“Congress, 535 commoditized temple monkeys pawing through the ruins of America in search of bribes. The bicameral whorehouse on Capitol Hill works like a vending machine. You put coins in the slot, select your law, and the desired legislation slides out.”
-Fred Reed, May 30, 2009
Friday-love the sound of that word.
We are finally at the end of earnings season, with retail earnings typically marking the end of the season given most have a January year end. Of the companies reporting, 67% have exceeded earnings estimates, the lowest level since the trough of the financial crisis. The mix of companies beating sales estimates was the lowest in many years at 56%. S&P earnings growth is coming in around 6%, a marked slowdown. There has been a lot of discussion about removing Apple (AAPL) from the numbers, which would push growth down to 2%. Whether we include some companies or not, the end result is that sales and earnings growth has slowed dramatically. The EPS slowdown can be attributed to weaker demand from Europe, margin pressure from higher commodity prices, and higher wage costs as hiring picks up slightly.
President Obama is finally calling the bluff of the Republican Congress, proposing a lower corporate tax rate in exchange for closing most tax loopholes. He is proposing a 28% rate, and, although very short on details, proposes eliminating most corporate deductions except those for clean energy and research and development. If the Congress can take this initial proposal and run with it, they are doomed at the polls in November.
Something funny has happened to high dividend paying companies over the past two months, they have underperformed. Most year-end summaries and 2012 planning guides that I read were heavily in favor of high yielding stocks. Almost on cue they have underperformed, and they could be in for a long period of underperformance. Although the underperformance has only been for a short time period, one possible explanation could be an expected tripling of the dividend tax coming in 2013. When tax rates on dividend were last raised in the 90’s, non-dividend paying stocks ripped, leaving their more conservative cousins in the dust.
Oil prices continue to rise, up for the seventh consecutive day, raising the risk that higher gasoline prices could quash the fledgling recovery. Concerns about Iran have been pressuring global prices. The President was on the stump yesterday trying to ease consumer concerns about the rising prices. “My administration has approved dozens of new pipelines, including from Canada” he said yesterday in Florida. What? Now he is just making things up! Google "Keystone XL" if you don't believe me.
NFLX has had a wild ride in the past nine months, peaking at $305, falling to $62, rebounding to $130, and now trading at $112. Comcast (CMCSA) announced plans to offer a subscription video service which will compete directly with NFLX. The service, Xfinity Streampix, will offer older movies and prior season TV shows for viewing on TV’s and all internet connected devices. The service will be priced at a discount to NFLX, $4.99 per month vs. $7.99. The service will be free to over 2 million subscribers who pay for more expensive tiers of video services. CMCSA has 22.3 million subscribers. By comparison, NFLX has 21.7 million subs, and HBO has 28.2 million. Verizon (VZ) announced a deal last month with Coinstar (CSTR), and Amazon (AMZN) has entered the race as well. It would seem the bundled service providers have an advantage over an independent such as NFLX.
The battle is on-Merrill Lynch (BAC) is offering 1.5x last year’s income for brokers moving over from other firms.
According to Credit Suisse, putting the 2.9% CPI into a longer perspective, a worker who begins working at age 25 would lose 68% of his purchasing power by the time he is 65 at 2.9% per year. Add another 20 years of retirement, and the first dollar that worker set aside would only buy $.18 of goods and services. Ouch.
How to solve the budget deficit? Certainly the recent budget cuts sound big, but let’s put them in perspective by simplifying the numbers:
* U.S. Tax revenue: $2,170,000,000,000
* Fed budget: $3,820,000,000,000
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000
Let's now remove 8 zeros and pretend it's a household budget:
* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts: $385
New Jersey Governor Chris Christie is “tired of hearing” about Warren Buffett’s tax plan. While doing an interview with Piers Morgan, Governor Christie said Mr. Buffett should “just write a check and shut up.” I’m not sure where he gets his reputation for speaking his mind.
US retail store traffic declined 1.9% in third week of Feb, bringing the month to date decline to 1.6%.
The Academy Awards are this weekend, and The Artist is gaining a lot of mind share with the press as the favorite for Best Picture.
Have a great weekend