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.

First Look at Dividend Grower Merck (MRK).

Gurufocus.com ran an article April 3rd, 2012 on “High-Dividend Yielders for 2012”.  Merck (MRK) was one the five stocks recommended in the article.  Apparently the author of the article thinks that a 3% dividend yield is a high dividend.  I think that a stock needs to yield at least 6% to be considered a high dividend stock.  Merck has some volatility in it’s earnings and it is approaching speculative pricing territory.  Read on to see when Merck was a value stock worth buying.

http://www.gurufocus.com/news/170209/5-highdividend-yielders-for-2012

Merck (MRK)

Price: $38.58

Shares: 3.04 billion

Market capitalization: $117.47 billion

What the company does – Merck & Co., Inc. (Merck) is a global health care company. Merck delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. It operates in four segments: Pharmaceutical, Animal Health, Consumer Care and Alliances. Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by Merck or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. It sells these human health pharmaceutical products to drug wholesalers and retailers, hospitals, government agencies and managed health care providers. In September 2011, it sold its 50% interest in the Johnson & Johnson-Merck Consumer Pharmaceuticals Co. joint venture. In December 2011, it announced establishment of an Asia Research & Development headquarters for drug discovery and development located in Beijing, China.

Morningstar’s take - Facing increased competition, patent losses, and a pipeline of late-stage drugs with poor chances of approval, Merck greatly improved its long-term outlook by acquiring Schering-Plough. Without Schering, Merck's prospects were muddled, despite its recent success launching several new blockbusters. Now, with the addition of Schering, we believe Merck is favorably positioned for long-term growth.

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Preferred stock: none that I’m aware of.

Bonds: $8.9 billion outstanding.  Some big bonds are coming due in 2015, but they aren’t threatening this year’s dividend.

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DIVIDEND RECORD: Merck paid a $0.03 quarterly dividend in 1987.  The quarterly dividend has grown to $0.42 per share in 2012.  It has increased its dividend 1,300% over 25 years.  Merck is a dedicated dividend grower.

Dividend: $0.42 quarterly

Dividend yield: 4.35%  (Merck becomes a 6% high dividend stock at a price of $28.00 per share)

Dividend payout: 82.8% using recent EPS of $2.03 –OR- 82.3% using average adjusted earning power of $2.04

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EARNING POWER: $2.04 @ 3.04 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

($1.04)

$3,275 M

2,193 M

$1.08

2008

$3.63

$7,808 M

2,145 M

$2.57

2009

$5.65

$12,853 M

2,273 M

$4.23

2010

$0.28

$859 M

3,120 M

$0.28

2011

$2.02

$6,257 M

3,040 M

$2.06

Merck’s five year average adjusted earnings per share is $2.04

Consider contrarian buying below $16.32 (8 times average adjusted EPS)

Consider value buying below $24.48 (12 times average adjusted EPS)  Merck’s stock price bottomed at $23.45 in April 2009.

Merck (MRK) is currently trading at 18.9 times average adjusted EPS.  This is stock is priced for investment, but is nearing speculative pricing.

Consider speculative selling above $40.80 (20 times average adjusted EPS)

BALANCE SHEET – 44% of Merck’s assets are comprised of goodwill and intangibles ($46.457 billion of $105.128 billion).  From 2003 through 2007 intangible assets only comprised about 4% of Merck’s total assets.  I don’t like so much subjectivity determining asset values.  The price to book value is too high.  The price to tangible book value is astronomical.

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Book value per share: $17.93

Tangible book value per share: $2.65  TBV is found by subtracting goodwill ($12.155 B) and intangibles ($34.302 B) from shareholder equity ($54.517 B) and then dividing by the number of shares (3.04 B)

Price to book value ratio: 2.15 (under 1.0 is good)

Price to tangible book value radio: 14.6

Current ratio: 2.04 latest quarter (over 2.0 is good)

Quick ratio: 0.92 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.28 (lower is better)

Percentage of total assets in plant, property, and equipment: 15.5% (the higher the better)  Current assets account for 31.6%, long term assets 5.46%, and other equity/investments 3.29%.

Working capital trend is way up.  Working capital equals current assets less current liabilities.  Financially strong companies have a positive upward trend.

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CONCLUSION – As usual, the best time to buy MRK in recent years was in April 2009.  It was a value investment back then.  Merck is a steady dividend payer and grower.  The dividend yield is nothing special until the stock takes a beating.  The company is still priced for investment at this time, but it’s getting dangerously close to 20 times average adjusted earnings.  I think it is time to get out of Merck.  Scale out of it above $40.80.  The balance sheet is weak when you look at the price to book value ratio and the tangible book value ratio.  Much of its assets are intangibles.  That in never a good sign.  Pharmaceutical companies are always a the mercy of FDA bureaucrats and their clinical trial approvals.  I don’t like the Sword of Damocles hanging over my investments.  I wouldn’t buy Merck until it is back below $24.48, if at all.

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DISCLOSURE – I don’t own Merck (MRK).

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Some examples of high price to tangible book values.

Last Friday I wrote my “Tip of the Week” on book value and its calculation.  I used the original writing of legendary value investor Benjamin Graham in that article.  If you missed it, then you can get it here:

http://www.myhighdividendstocks.com/high-dividend-stocks/tip-of-the-week-book-value-or-equity-and-how-to-calculate-book-value-per-share

At the end of the article I calculated the tangible book value of Safe Bulkers (SB).  Today I will take a look at the tangible book value of a few more stocks: AT&T (T), Verizon (VZ), Terra Nitrogen (TNH), Goldcorp (GG), Southern Copper (SCCO), and Apple (AAPL).

AT&T (T) tangible book value

Shareholder equity equals $105.534 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  AT&T claimed $70.842 billion in goodwill assets as of 4Q2011 and $59.343 billion in intangibles.  AT&T’s tangible book value is negative $24.651 billion dollars.  The company has 5.93 billion shares outstanding.  AT&T’s tangible book value per share is negative $4.15 dollars.  That really stinks.  Maybe Verizon has a positive net book value per share.  AT&T stock sold for $30.64 recently.  Their price to tangible book value ratio is negative.

Verizon (VZ) tangible book value

Shareholder equity equals $35.97 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Verizon claimed $23.357 billion in goodwill assets as of 4Q2011 and $79.128 billion in intangibles.  Verizon’s tangible book value is negative $66.515 billion dollars.  The company has 2.84 billion shares outstanding.  The tangible book value per share is negative $23.42 dollars.  That really stinks also.  Verizon stock sold for $37.46 recently.  Their price to tangible book value ratio is negative.

Terra Nitrogen (TNH) tangible book value

Shareholder equity equals $269.3 million.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Terra Nitrogen claimed no goodwill or intangibles as of 4Q2011.  Terra Nitrogen’s tangible book value is $269.3 million.  The company has 18.69 million shares.  The tangible book value per share is $14.41.  That is very low compared to the current stock price.  Terra Nitrogen stock sold for $262 per share recently.  Their price to tangible book value ratio is 18.18.  Shareholders that bought at $262 are paying $18.18 for each $1.00 in tangible assets.  That is a whopping premium on invested capital.  A smart businessman would never overpay so much for so little assets.  Stay away from Terra Nitrogen because there is much more risk than reward.

Goldcorp (GG) tangible book value

Shareholder equity equals $21.272 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Goldcorp claimed no goodwill of $1.737 billion as of 4Q2011.  Goldcorps’s tangible book value is $19.535 billion.  The company has 810 million shares.  The tangible book value per share is $24.11.  Goldcorp stock sold for $41.04 per share recently.  Their price to tangible book value ratio is a respectable 1.7.  Goldcorp stock will be cheap when the price is near one times tangible book value.

Southern Copper (SCCO) tangible book value

Shareholder equity equals $4.015 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Southern Copper claimed intangibles of $110 million as of 4Q2011.  Southern Copper’s tangible book value is $3.905 billion.  The company has 840.98 million shares.  The tangible book value per share is $4.64.  Southern Copper’s stock sold for $30.46 per share recently.  Their price to tangible book value ratio is an overpriced 6.56.  SCCO share holders who bought near $30.46 are paying $6.56 for each dollar of invested capital.

Apple (AAPL) tangible book value

Shareholder equity equals $76.615 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Apple claimed $896 million in goodwill and $3.536 billion in intangible in their 4Q2011 financials.  Apple’s tangible book value is $72.183 billion.  The company has 932.37 million shares.  The tangible book value per share is $77.42.  Apple’s stock sold for $636.23 per share recently.  Their price to tangible book value ratio is grotesque 8.22.  AAPL share holder who bought near $636 are paying $8.22 for each dollar of invested capital.

Goldcorp is the only stock on this short list with a price to tangible book value under 2.0 and even that isn’t cheap.  I wrote this article to serve as a warning to value investors and high dividend stock investors.

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TIP OF THE WEEK - Book Value or Equity and How to Calculate Book Value per Share

Book Value or Equity and How to Calculate Book Value per Share

Jason Brizic

April 6th, 2012

Knowing the book value of a company helps the intelligent investor to buy low.

You want to buy assets that produce profits as cheap as possible.

The following comes from Benjamin Graham’s 1937 book The Interpretation of Financial Statements.

The book value of a security is in most cases a rather artificial value.  It is assumed that if the company were to liquidate, it would receive in cash the value at which its various tangible assets are carried on the books.  Then the amounts applicable to the various securities in their due order would be their book value.  (The word “equity” is frequently used instead of book value in this sense, but it is generally applied only to common stocks and to speculative senior securities.)

As a matter of fact, if the company were actually liquidated the value of the assets would most probably be much less than their book value as shown on the balance sheet.  An appreciable loss is likely to be realized on the sale of the inventory, and a very substantial shrinkage is almost certain to be suffered in the value of the fixed assets.  In practically every case the adverse conditions which would lead to a decision to liquidate the business would also make it impossible to obtain anywhere near cost or reproduction price for the plant and machinery.

The book value really measures, therefore, not what the stockholders could get out of their business (its liquidating value), but rather what they have put into the business, including undistributed earnings.  The book value is of some importance in analysis because a very rough relationship tends to exist between the amount invested in a business and its average earnings.  It is true that in many individual cases we find companies with small asset values earning large profits, while others with large asset values earn little or nothing.  Yet in these cases some attention must be given to the book value situation, for there is always a possibility that large earnings on the invested capital may attract competition and thus prove temporary; also that large assets, not now earning profits, may later be made more productive.

CALCULATING BOOK VALUE

As has already been said, in calculating book value it is assumed that the company’s assets are worth the figure shown on the balance sheet.  Indeed, book value simply means the value as shown by the books or balance sheet.

To take a simple example, a company’s balance sheet is as follows:

Fixed Property

$1,000,000

Capital Stock

$1,700,000

Good-will

500,000

Surplus

100,000

Current Assets

500,000

Current Liabilities

200,000

$2,000,000

$2,000,000

In this case the capital stock is represented by 17,000 shares of $100 par value common stock.  To find the book value of the common stock, add the $100,000 surplus to the $1,700,000 value shown for the stock, making a total of $1,800,000.  Then look on the asset side of the balance sheet for intangibles.  You will find $500,000 good-will.  This is then deducted from the $1,800,000, leaving $1,300,000 equity available for the 17,000 common shares.  Incidentally, the figure $1,300,000 is often referred to as the “net tangible assets” of the company.  Dividing this out, the net book value per share would be $76.47.

If you had not deducted the intangibles and had simply divided the $1,800,000 by the 17,000 shares you would have found the book value per share to be $105.88.  You will not that there is quite a difference between this book value and the net book value of $76.47 a share.  If only “book value” of the stock is mentioned, tangible or net book value is usually meant.  The larger figure may be termed: “Book value, including intangibles.”

I will perform this calculation on one of my favorite high dividend stocks – Safe Bulkers (SB)

Fixed Property

$777,663,000

Capital Stock

$71,000

Intangibles

0

Additional Paid-in Capital

114,918,000

Current Assets

37,959,000

Retained Earnings

216,853,000

Other Investments

11,649,000

Current Liabilities

51,673,000

Other Long Term Assets

50,000,000

Non-current Liabilities

493,756,000

$877,271,000

$877,271,000

All of this balance sheet information is as of 4Q 2011.  Safe Bulkers has since added another 5,750,000 shares and $37,375,000 in additional paid-in capital since the 4Q 2011 report.  Safe Bulkers had 70,896,924 shares at the time of the 4Q 2011 financials report.

Safe Bulkers had $331,842,000 in book value at the end of 4Q 2011 (equity values – intangibles; highlighted in yellow above).  Divided that by 70,896,924 shares and you get a book value per share of $4.68.  That would be a very nice, low price to buy Safe Bulkers at.  Safe Bulkers sold for $3.00 - $2.50 per share at the depths of the 2009 recession.

Safe Bulkers book value per share rises to $4.82 if you include the additional paid-in capital the company raised after 4Q 2011.  This also assumes they didn’t incur any new liabilities in the meantime either.

For more tips, go here:

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

First Look at ExxonMobil (XOM). Don't buy until after double-dip recession.

A recent article on Guruwatch.com listed ExxonMobil as one of the recommend dividend stocks for 2012.  I think this is bad advice at the current price $85.18 and dividend yield of 2.2%.  Read on to find out why.

http://www.gurufocus.com/news/170209/5-highdividend-yielders-for-2012

ExxonMobil (XOM)

Price: $85.18

Shares: 4.71 billion

Market capitalization: $401.42 billion

What does the company do – Exxon Mobil Corporation (Exxon Mobil) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. The Company has a number of divisions and affiliates with names that include ExxonMobil, Exxon, Esso or Mobil. Divisions and affiliated companies of ExxonMobil operate or market products in the United States and other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. In October 2011, Cosan SA Industria e Comercio bought the distribution assets of Exxon Mobil in Bolivia, Paraguay and Uruguay. In January 2012, Apache Corporation acquired Exxon Mobil's Mobil North Sea Limited assets including the Beryl field and related properties.

Morningstar’s take - ExxonMobil sets itself apart among the other supermajors as a superior capital allocator and operator. Through a relentless pursuit of efficiency, technology, development, and operational improvement, it consistently delivers higher returns on capital relative to peers. With a majority of the world's remaining resources in government hands, opportunities for the company to expand its large production base are limited. However, we believe ExxonMobil's experience and expertise, particularly with large projects, should allow it to successfully compete for resources.

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Preferred stock: none.

Bonds: $786.8 million outstanding.  That is a very small amount for a company as large as ExxonMobil.  The bonds are not a threat to the dividend.

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DIVIDEND RECORD: Dividend grower since 1987.  Their quarterly dividend has grown from $0.11 in 1987 to $0.47 in 2012.  That is a 327% gain over 25 years or it can be expressed as a 13.1% straight-line gain per year (not compounded)

Dividend: $0.47

Dividend yield: 2.2% ($1.88 annual dividend / $85.18 share price)

Dividend payout: 22% using 2011 EPS of $8.42 –OR- 25% using average adjusted earning power of $7.50 per share.  XOM doesn’t believe in paying out a large percentage of its profits to shareholders or they would increase the percentage of the dividend payout.  The dividend payout has averaged 27% since 2001 with a max of 55% in 2001.  The next highest payout was in 2008 when the stock price crashed.

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EARNING POWER: $7.50 per share @ 4.71 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

$7.28

$40,610 M

5,517 M

$8.62

2008

$8.66

$45,220 M

5,194 M

$9.60

2009

$3.98

$19,280 M

4,848 M

$4.09

2010

$6.22

$30,460 M

4,897 M

$6.47

2011

$8.42

$41,060 M

4,875 M

$8.72

Five year average adjusted earnings per share is $7.50

Consider contrarian buying below $60.00 (8 times average adjusted EPS)

ExxonMobil (XOM) is currently trading at 11.4 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $90.00 (12 times average adjusted EPS)

Consider speculative selling above $150.00 (20 times average adjusted EPS)

BALANCE SHEET – The high price to book value ratio should keep you away from XOM.  The current and quick ratios show that XOM has little current assets to cover current liabilities.  The company’s working capital has eroded over the years.  It is now negative for several years.  That isn’t a good sign.  This means that the company had to get $5 billion dollars from somewhere other than operations to meet its current liabilities.

Book value per share: $32.78

Price to book value ratio: 2.6 (under 1.0 is good)  Buyers of ExxonMobil at today’s price of $85.18 are paying a huge premium over book value per share.

Current ratio: 0.94 latest quarter (over 2.0 is good)

Quick ratio: 0.66 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.06 (lower is better)

Percentage of total assets in plant, property, and equipment: 64.8% (the higher the better)  Current assets 22%, long term assets 10.3%, and intangibles 2%

CONCLUSION – The best time to buy ExxonMobil in recent years was in June 2010 when oil was at $71 per barrel.  This is interesting because oil bottomed in 2009 below $46 per barrel.  XOM is a decent dividend grower historically.  Their yield has never been very high, but since they only payout an average of 27% the dividend has never been threatened.  The stock is currently in value territory at 11.4 times average adjusted earnings.  The only thing that I don’t like about XOM is the high book value ratio per share and the weak current and quick ratios.  The coming worldwide double dip recession will drop the price of oil from its current price of around $100 per barrel.  That event will hurt XOM’s earnings and the price will drop like it did in 2009 – 2010.  I think you will have an opportunity to buy XOM between $60 - $53 again in the next two years.

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DISCLOSURE – I don’t own ExxonMobil (XOM).

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(download)

Quantitative Easing explained in less than two minutes

This short two minute video explains quantitative easing better than
anything else I've seen.

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First Look at Kraft (KFT) - An Excellent Dividend Grower.

Gurufocus.com ran an article yesterday on “High-Dividend Yielders for 2012”.  Kraft (KFT) was one the five stocks recommended in the article.  Apparently the author of the article thinks that a 3% dividend yield is a high dividend.  I think that a stock needs to yield at least 6% to be considered a high dividend stock.  Kraft has very stable earnings, but it is overpriced right now .  Read on to see when Kraft was a value stock worth buying.

Kraft (KFT)

Price: $38.29

Shares: 1.77 billion

Market capitalization: $67.71 billion

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Preferred stock: none

Bonds: $26.5 billion outstanding.  The outstanding bonds are not a threat to the dividend this year.

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DIVIDEND RECORD:  Kraft has been an excellent dividend grower since 2001.  The annual dividend has grown from $0.26 annually to $1.16.  I don’t know if they paid a dividend before 2001.

Dividend: $0.29 quarterly

Dividend yield: 3.0% ($1.16 annual dividend / $38.29 share price)

Dividend payout: 58.3% using 2011 EPS of $1.99 –OR- 63.7% using average adjusted earning power of $1.82.  Kraft is a dedicated dividend payer.

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EARNING POWER: $1.82 @ 1,772 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

$1.62

$2,590 M

1,594 M

$1.46

2008

$1.90

$2,884 M

1,515 M

$1.63

2009

$2.03

$3,021 M

1,486 M

$1.70

2010

$2.39

$4,114 M

1,720 M

$2.32

2011

$1.99

$3,527 M

1,772 M

$1.99

Five year average adjusted earnings per share is $1.82

Consider contrarian buying below $14.56 (8 times average adjusted EPS)

Consider value buying below $21.84 (12 times average adjusted EPS)

Consider speculative selling above $36.40 (20 times average adjusted EPS)

Kraft (KFT) is currently trading at 21 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – [add a summary of the balance sheet there]

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Book value per share: $19.87

Price to book value ratio: 1.93 (under 1.0 is good)  You would be paying a large premium to book value if you buy Kraft at today’s price of $38.29 per share.

Current ratio: 0.85 latest quarter (over 2.0 is good)  Where will Kraft get the current assets to cover current liabilities?

Quick ratio: 0.43 latest quarter (over 1.0 is good)  The company has very little cash to cover current liabilities.

Debt to equity ratio: 0.63 (lower is better)

Percentage of total assets in plant, property, and equipment: 14.72% (the higher the better)  I like to see this number above 50%.  Most of Kraft’s assets 66.5% are comprised of intangibles and goodwill.  Current assets comprise 17.27%.

CONCLUSION – Kraft is a moderate yielding dividend stock at 3.0%.  They have been an excellent dividend grower since 2001.  The dividend was $0.26 per year in 2001.  Now the dividend is $1.16 per year.  That is a 284% increase over 11 years.  Unfortunately, the stock is speculatively priced now at 21 times average adjusted earning power.  The best time to buy Kraft when it was a value was back in April 2009 when was trading for 11.5 time average adjusted earnings.  Kraft’s balance sheet is not strong.  The price to book value ratio is quite high and it has very little in the way of current assets and cash compared to current liabilities.  I’m always suspicious of the book value when it is mostly supported asset values dominated by intangibles and goodwill.  Give Kraft a second look below $21.84 per share.  A worldwide double dip recession will drop the price back down to attractive levels that could provide safety of principal and adequate returns.

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DISCLOSURE – I don’t own Kraft (KFT).

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SF FED Bank President thinks several trillion dollars in so-called stimulus is not enough

Bloomberg Businessweek ran this online article today about SF FED President, John Williams, comments on the need for more dollar counterfeiting.

http://www.businessweek.com/news/2012-04-03/fed-s-williams-sees-need-for-strong-stimulus-to-boost-recovery

My comments to the article are in red below.

Federal Reserve Bank of San Francisco President John Williams said the central bank must continue to act “vigorously” to boost the economy and sustain labor market gains.

Let me translate, “Tenured technocrat with a lifetime pension  who didn’t predict the financial crisis of 2008 now knows what to do.  The Fed should create a lot of money out of thin air.”

“We are far below maximum employment and are likely to remain there for some time,” Williams said in the text of remarks given today in San Diego. “Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish.”

The US is comprised of individuals.  There is no “we”.  That is collectivist commie-speak.  Immoral, unconstitutional minimum wage laws prevent employers from hiring labor at market rates.  Socialist unemployment welfare provides a incentive not to work for some individuals.  He’s right since no legislators are proposing abolishing minimum wage laws and they aren’t trying to abolish unemployment welfare.

Monetary stimulus is code word for creating trillions of dollars out of thin air and giving it to large banks who will buy some government bonds or store it at the Federal Reserve as excess reserves (earning 0.25% interest from the FED).  They will not loan it into the economy, so the so-called recovery will remain sluggish.

The policy-setting Federal Open Market Committee on March 13 maintained its pledge to keep interest rates low through at least late 2014, noting improvements in employment while also saying “significant downside risks” remain. Still, policy makers saw no need to roll out new easing measures unless growth faltered, minutes of last month’s meeting showed today.

The FOMC is not keeping interest rates low.  The commercial bankers are keeping interest rates low.  Normally the FED controls the FED Funds Rate which is the rate that commercial banks charge each other for overnight loans to meet legal reserve requirements.  But these aren’t normal times.  The commercial bankers have $1.6 trillion in EXCESS reserves.  They aren’t lending to each other overnight because they are to the stratosphere will extra reserves above the legal limit.  This make the FED Funds rate drop to near zero.  The FOMC is pretending that they are in control of that interest rate.

The significant downside risks include European recession brought on the the sovereign debt crisis.  The other risk is a Chinese recession brought on by Keynesian, mercantilist policies of “stimulus”.  The Chinese government has been printing yuans to keep up with the Federal Reserve stimulus.  This keeps the exchange rate between the yuan and the dollar near constant, but it also creates price inflation and discontent inside China.  Chinese banks have been lending the newly created money into their economy which expands the money supply even more due to the fractional reserve banking process.  So they have to slow down or they will experience hyperinflation.  The decrease in the rate of monetary expansion will show many so-called investments (think about their real estate and constrution boom) to be malinvestments.  A recession will ensue.

Recent data signal a strengthening U.S. recovery, with an improving labor market encouraging consumers to spend more in the world’s largest economy. The unemployment rate has fallen to 8.3 percent, its lowest in three years.

The economic data is Keynesian by nature.  The author is talking about the recent 2%-3% gross domestic product estimates for this year.  The GDP is a bogus number because Keynesians think that government spending adds to the economy.  It takes money away from savings, investments, and consumption in the form of taxes.  The money that could have been used by consumers and investors is then wasted by pensioned bureaucrats and politicians to buy votes.  The GDP is measured in dollars; therefore, FED money creation “stimulus” makes it go up even though there are fewer goods after the bureaucratic waste.

The real unemployment number is much larger somewhere in the range of 14% - 17% when you count people who want to work full time, are able to work, or are dropped from the unemployment rolls after their benefits run out.

“Unfortunately, the kind of moderate economic growth I expect won’t sustain such rapid progress” in the job market, Williams said. The time to begin tightening monetary policy is “still well off in the future,” he told students at the University of San Diego.

The real unemployment problem is not going away fast enough despite three rounds of so-called stimulus.  So what is needed is more stimulus.  Years and years of printing dollars will do the trick.  It worked so well in 1920’s Germany, Hungary after WWII, South America, the former Yugoslavia, and most recently Zimbabwe.

Williams forecast economic growth of 2.5 percent this year and 2.75 percent in 2013. The unemployment rate will remain around 8 percent at the end of 2012, and is likely to be about 7 percent at the end of 2014, he predicted, according to the prepared remarks.

If the FED prints money, then GDP will rise.  But individuals will be poorer because each dollar will have less purchasing power than before thanks to the inflation of the money supply.  The problem will be worse if the banks decide to expand lending.  More money will be created.  GDP growth is a lie to make you think you are becoming more prosperous when you’re actually getting robbed.

The unemployment will drop because of all the reasons I gave above.  Less people will be working in 2013 and 2014 than are working now in 2012.

‘Stronger Recovery’

“I’m encouraged by recent signs of a stronger, self- sustaining recovery,” Williams said. “I’m especially glad to see that the economy is adding jobs at a pretty decent clip. Still, we have a long way to go.”

The pretty decent clip is less than the number needed to keep up with population growth.  He was clueless in 2008.  He is clueless now.  But he makes good money and has a FED pension.  There are no negative sanctions awaiting him is his optimism is misplaced.

U.S. stocks extended losses today and Treasuries fell as minutes from the FOMC’s last meeting showed central bankers are holding off on increasing monetary accommodation unless the U.S. economic expansion falters. The Standard & Poor’s 500 Index of stocks lost 0.7 percent to 1,409.42 at 3:14 p.m. in New York, retreating from an almost four-year high.

Investors are disciples of Keynesian economics also.  They are sad when the FED hints that they won’t print as much money as Wall Street investors estimated.  They sell some stocks when they are sad.

Government bonds are in a bubble.  They are not safe, but they are touted as safe by Keynesian educated financial advisors.  Are Greek bonds safe?  These people thought so two years ago.  They continue to be wrong.

“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of that meeting released today in Washington. “Most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014.”

Keynesian central bankers believe in free lunches.  There are no free lunches.  The negative effect of their past and future money printing is ruinous price inflation followed by the Greater Depression.  Plan accordingly.

Consumer spending in February grew 0.8 percent, marking the biggest gain in seven months, Commerce Department figures showed March 30. Manufacturing growth accelerated in March, according to the Institute for Supply Management’s index released April 2.

Individuals need to save more money.  When you save you forego consumption.  You accumulate capital that can be invested in producing capital goods.  Capital goods product consumer goods.  Capital goods increase the supply of consumer goods.  A large supply of consumer goods usually leads to a drop in consumer goods prices.  You get more goods for less dollars.  Your standard of living goes up.  Keynesians hate this.  They think that there is a paradox of thrift.

The paradox of thrift goes something like this: saving is good unless everyone does it; if they do then the economy crashes.  Keynesians can’t think straight.  They don’t follow the money.  Where do you usually put your savings.  Answer: in a bank as savings or into the stock market.  What does the bank normally do with your deposit.  Answer: it loans it out to entrepreneurs trying to make profits producing and selling capital goods or providing consumer goods.  So how exactly the saving prevent the creation of more capital goods and consumer goods in the economy?  Keynesians don’t have an answer except, “Don’t save.  Spend money now to help the GDP numbers.  Even better spend money you don’t have now.  Go into debt to spend now to help the GDP numbers.”

Williams, 49, is a voting member of the FOMC this year. He became the San Francisco Fed’s president in March 2011 after two years as its director of research.

You will not find any prediction by this man between 2005 and 2008 warning you of a financial crisis.  His research was bought and paid by the FED to tout the FED.  The FED is your enemy.  He will vote to ruin your purchasing power.  Buy some gold coins if you don’t have any yet.

To contact the reporters on this story: Aki Ito in San Francisco at aito16@bloomberg.net; Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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When the VIX is Low Its Time to Go!

The low numbers of the Volatility Index scares me.  The old saying goes, “When the VIX is low; it’s time to go.  When the VIX is high, it’s time to buy.”  The VIX is low right now.  That usually signals a market top because most options traders of the S&P 100 stocks are complacent.  There will be high dividend stock bargains when the stock market takes a dive.  Take this time to assemble your watch list.

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Read this Zeal LLC essay on the volatility index (VIX or the VXO) if you don’t know what I’m talking about: http://www.zealllc.com/2008/vxospx.htm

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American Capital Agency Corp (AGNC) Cut Its 1Q 2012 Dividend 10.7%

It was only a matter of time until American Capital Agency Corp. (AGNC) cut its dividend.  AGNC was paying out more than they were earning for several quarters.  Their dividend payout ratio was over 100%.  I warned about this back on December 13th, 2011.

http://tinyurl.com/blcxzln

At that time faceless, nameless Wall Street analysts expected AGNC to earn $1.18 per share for the 4th quarter of 2011.  Their 4Q 2011 financials revealed that they only earned $0.99.  That pushed the dividend payout ratio all the way up to 141%.  This madness had to stop.  It finally did.

On February 6th, 2012 AGNC’s board of directors announced a 10.7% dividend cut.

http://www.reuters.com/finance/stocks/AGNC.O/key-developments/article/2475150

They cut the dividend from $1.40 per quarter down to $1.25 per quarter for March 2012.  That breaks their streak of ten consecutive quarters of $1.40 dividend payments.

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The Federal Reserve will likely buy more agency mortgage-backed securities in the future.  This will bid up the price of those securities.  That will eat into AGNC’s shrinking profits.  The cost of borrowing is increasing and the asset yield is decreasing.  You can read about that here in AGNC’s 4Q 2011 financials release: http://tinyurl.com/bq5fgfz  

The dividend is not secure.  AGNC is leveraged 7.6 times.  Leverage giveth and leverage taketh away.  I expect another cut in a few quarters.

Disclosure: I don’t own American Capital Agency Corp. (AGNC).

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Medical Fascism in America

Marketwatch ran this article yesterday.  There are more like it on the internet today.  Medical fascism is alive and well in America.  My comments are in red below.

March 27, 2012, 1:39 p.m. EDT

Justices show split over health-insurance mandate

High court adopts ideological stances on purchase requirement

By Russ Britt, MarketWatch

LOS ANGELES (MarketWatch) — Supreme Court justices appeared to be split along ideological lines after hearing arguments over whether U.S. citizens should be made to buy insurance — the central issue in the health-care-reform debate — in a second day of hearings Tuesday.

Obamacare is medical fascism.  Fascism occurs when government regulates corporations to such an extent that they are just arms of the government with the illusion of private property rights.  Government is telling medical corporations and insurance companies how to run their business and it is forcing the individuals of society to buy it.  This is sickening and tyrannical.

Blog reports from The Wall Street Journal and other sources, however, indicated that there may be two swing votes in Chief Justice John Roberts and the court’s perennial ideological straddler, Justice Anthony Kennedy.

President George W. Bush nominated Chief Justice John Roberts in 2005.  He filled the vacancy left by the death of William Rehnquist.  President Ronald Reagan appointed Justice Anthony Kennedy in 1988.

Reports showed that the court’s liberal bloc, Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan, were arguing in favor of the 2010 Affordable Care Act and its so-called individual mandate during the two-hour debate.

I wonder what portions of the US Constitution the liberal judges were using to support their arguments for the 2010 Medical Fascism Bill?

Meanwhile, conservative appointees to the high court were strongly challenging those who were supporting the requirement that all U.S. citizens be insured. Solicitor General Donald Verilli faced rapid-fire questioning from Justices Antonin Scalia and Samuel Alito in the latter half of the two-hour argument devoted to the question.

What were the Solicitor General’s arguments for forcing U.S. citizens to buy health insurance?  What part of the US Constitution

Throughout the debate, the Journal’s blog indicated that Ginsburg, Kagan and Breyer came to Verrilli’s defense several times as the law faced skeptical questioning from the more conservative justices.

Ginsburg argued at one point that the decision by an individual not to buy insurance affects others. But Scalia and Alito questioned that. Alito contended that the law forces young, healthy people “to subsidize services that will be received by somebody else.”

Individuals make billions of decisions everyday not to buy millions of products or services marketed to them worldwide.  Their decision not to buy affects others, but so what?  Producers of goods and services must persuade individuals to buy their goods voluntarily.  They must make them a better deal.  They must serve customers desires or they will go bankrupt.  Is everyone obligated by government force to buy goods and services that they don’t want just because the seller of the good or service might be affected?  This is lunacy.  Justice Ginsburg absolutely abhors a free market.  Hasn’t she affected red robe makers by not buying their red judge robes and wearing a black robe instead.  Should the government force her to buy red robes instead of black robes be she is affecting them.  If they do, then now the black robe clothiers are affected.  She is a Marxist in supreme court justice’s clothing.

If there is no individual mandate, Ginsburg also said, it would force the price of insurance higher. Scalia countered that’s no different than buying a car; if fewer people buy cars, that could force up prices.

Supreme court justices have no concept of economics.  Politicians enact laws prohibiting free and open competition amongst producers.  The existing producers lobby the politicians to enact barriers to entry for new competition.  This reduces the supply of healthcare while increasing the price of healthcare.  Cartels are bad for consumers of healthcare.  Consumers get high prices and crappy healthcare.  What is needed is the elimination of government involvement in healthcare.  Large profit margins will attract entrepreneurs to invade the existing healthcare market to provide better healthcare than is currently available from the healthcare cartel.

Roberts wondered whether the requirement to buy health insurance is the same as forcing individuals to prepare for other types of emergencies, according to Journal posts. Later, he said the requirement to buy insurance could open the doors for Congress to require the purchase of other types of goods in the future.

 “All bets are off,” Roberts remarked.

It is immoral to force an individual to allocate his life, liberty, or property to the purchase of goods that he has already voluntarily decided not to purchase.  How would the justices like being forced to cross train for a triathlon three hours per day so they can stay fit and not affect the healthcare systems’ costs which “affects others” who pay the taxes that pay for the healthcare system?

Verrilli has responded in most instances by framing the issue around market regulation, which is something that Congress can oversee under the Constitution’s interstate-commerce clause. The clause gives Congress the power to regulate markets. Virtually all individuals are or will become part of the health-care market, he has argued.

The interstate-commerce clause does not give the congress the power to regulate markets.  It was supposed to prevent states from enacting tariffs that would keep commerce from being “regular”.  See Judge Andrew Napolitano’s more eloquent explanations here: http://tinyurl.com/bp47ny3 .  Statists of both parties had use this clause to justify regulation of everything and anything.

Kennedy said Verrilli needed to answer a “very heavy burden of justification” to show how the Constitution authorizes Congress to require that individuals buy insurance or pay a penalty. At one point, Kennedy commented that the mandate changes the relationship between citizens and the government “in a fundamental way.”

If you really want to see the legitimacy of the US Constitution or any constitution destroyed, then read Lysander Spooner’s “No Treason: The Constitution of No Authority” essay from the 19th century.  Spooner was an abolitionist in the late 19th century.  http://en.wikipedia.org/wiki/No_Treason

But both Kennedy and Roberts grilled Paul Clement, the attorney arguing to strike the mandate on behalf of 26 states.

The law is patently unconstitutional since providing healthcare is not an enumerated power of congress in Article I Section 8.  Don’t these justices see the tyranny that is involved here?

Roberts noted that the government is simply trying to regulate the financing of health care, while Kennedy said all citizens are part of the health-care risk pool, according to the Journal’s blog.

During that portion of the session, Scalia and Alito reportedly did not challenge Clement, indicating they’re planning to support overturning the mandate.

Without the individual mandate, other provisions of the law could be struck down. The mandate places healthy people into the risk pool so that their costs can be shared with those of unhealthy persons.

But it is possible that the court will strike down only the individual mandate, leaving the requirement that insurance companies must offer coverage to any individual, regardless of his or her health history.

If you believe in voluntary exchange, free markets, and property rights; then you should see the immorality of forcing insurance companies to offer coverage to individuals that they would voluntarily choose not to insure.  People that don’t think that is right or who would want it any different way are free to pool their capital to start their own insurance company that makes its unique service proposition to their customers “We insure anyone regardless of their health history!”.  That company will be bankrupt in a short amount of time.

Insurers including UnitedHealth Group Inc. (NYSE:UNH)  and WellPoint Inc. (NYSE:WLP)  struggled on the day, down as much as 2%.

UnitedHealth Group (UNH) pays a paltry 1.17% dividend and WellPoint (WLP) pays a measly 1.64% dividend.

The court hearings took place as protesters from both sides of the health-care debate gathered outside the building. Among those calling for the overturning of the mandate was tea party-favorite Rep. Michele Bachmann, the conservative Republican from Minnesota who dropped out of this year’s presidential race.

Government pits people who would ordinary not interact or have conflict with one another against each other.  This is the lesson in the book/movie The Hunger Games.  Go see it or read it.

Separately, the nonpartisan Urban Institute issued a study Tuesday saying that 7% of all those under age 65 would be subject to the rule requiring the purchase of insurance.

The study says 87.4 million nonelderly Americans would be exempt from the individual mandate because of their low-income or undocumented status. Of the remaining 181 million Americans under age 65, an estimated 86% have insurance, the study says.

Develop a relationship with doctors and nurses in your local area who will be willing to work in the grey market of healing before the full force of medical fascism takes effect.