Twister Is Full Of Hot Air

For some time now the Tea Party activists have been calling for Ben Bernanke's head to roll.  I personally thought he was doing a decent job in pursuing the mandate assigned to the Fed, which is keeping inflation under control while increasing the prospects of jobs in the U.S. 

After yesterday's announced intervention called Twister, I'm beginning to have my doubts.  How is further lowering interest rates through manipulation of treasury markets going to put more people back to work, increase corporate spending, or build consumer confidence?  The answer, it will not. The Fed is only doing its job with what they have left for ammunition.  A water pistol does little against the gatling gun of economic issues facing our great country.  Twister just adds more instability to an already over stimulated economy.  Perhaps currency stability should be another mandated Fed watch?

May I suggest a few actions our government could take which would show us that our people in Washington have some understanding of simple economics?   Let's not forget housing and the devastating impact it has on confidence.  Many of my co-workers are upside down on thier mortgages and can't get re-financed at lower rates becasue they no longer qualify.  They are current on payments but unable to meet the current standards for a refi.  How about rewarding these people with new lower rate mortagages? Since there is no debt to forgive right now, let's just get them into a better cash flow situation and say thank you for paying what you owe instead of running away from the payback obligation.  STOP trying to save the delinquent holders and reward the current holders!!  This would encourage people to have faith in the system and build confidence.  An added benefit would be putting cash into the hands of people who have proven they can manage their own household's income.

Repatriate the 1.7 TRILLION dollars American companies have overseas because of tax reasons.  These dollars have already been taxed overseas and American companies can't bring the money back without being assesed the corporate 35% U.S. tax.  Allowing return of these dollars with reduced taxes or NO taxes could have a significant impact on our economy and jobs picture.  Currently, the funds are not subject to tax, as they linger in foreign banks.  They can be invested overseas in factories and jobs without any detrimental tax consequences.   With this huge amount of funds back here in the US, some companies will buy back stock, pay dividends, hire new workers, build new plants, and increase research and development spending.   In all these events, it would be a plus to the companies and citizens of the country to have this stockpile of dollars returned home.

Another easy action would be to take some pressure off the banks.  Some of the new regulations are overbearing, and as Jamie Dimon says "un-American".  Let's not continue to bash the banks!  Many short-sighted people had a part in the greedy landscape of the mid-2,000's, and constant slamming of the banks isn't helping the confidence indicator.  Wasn't it Dodd and Frank who insisted banks lend to those that could not afford a house as determined by traditional lending standards?    (Hello, Fannie Mae and Freddie Mac.).  Most banks were regulated into their current situation by the SAME people who are writing the NEW regulations.  Scary stuff.

See ya,
(Reminder:  Check this blog's archives for other artcles.)
Steve M

Fall is Apple picking season

Recently a friend of mine asked that I comment on an article's following statement:  "The stock is really cheap for the kind of operating fundamentals they are putting up."  The writer was referring the to stock of Apple corporation (AAPL), and most of us want to know how he came to this conclusion.  Is it justified?  Logical?

First we must understand what he means by operating fundamentals.  These fundamentals are the tools (see Lesson 1 Tool Box) referring to price earnings ratio or p/e.  There are many other operating fundamentals that have not been examined in this blog yet, but some we will explore in future blogs are cash on hand,  debt, book value, and free cash flow.

Anyway, let's look at what we learned in lesson one: price to earning ratio (p/e).  Apple is expected to earn $28.00 per share in 2011 and $32.00 per share in 2012.  Based on trailing earnings (2011), Apple has as p/e ratio of 13.57 (stock price of $380.00 divided by $28.00 earning per share) and 11.875 based on forward earnings (2012).  These ratios are considered very low for a company that grew 80% in 2011 and expected to grow greater than 20% over the next five years.  If we take into account the $100.00 per share in cash on hand and subtract that from the current stock price, we would have p/e ratios of 10 and 8.75.  If Apple actually beats the projections for earnings (which they have by 20% or more over the last six quarters), then these ratios would be insanely low by any measure historically.  Therefore, we can conclude that using a price earnings ratio as a tool,  Apple is a screaming buy at these levels!!!

Let's look at one other fundamental without exploring the details at how we arrive at the number.  Free cash flow.  Free cash flow is used as a tool because it examines in greater detail how a company is managing its profit or earnings.  Earnings can sometimes be manipulated with the pencil strike of a creative accountant or chief financial officer.  Manipulation does not neccesarily mean illegal, as there are general accepted accounting principles (gaap) which allow wide ranges of interpretation regarding inventories, asset value and liabilities.  Free cash flow takes much of the guess work out of anaylyzing earnings and simply computes the amount of net cash (cash less expenditures) a company earns or puts aside during a quarter.  Comparing free cash flow to earning per share (eps) can help us understand if the earnings number is real and not some accounting stretch to keep the investment community temporarily happy.

Interestingly, Apple is currently generating 38 billion dollars of free cash flow per year which is even greater than what they show as earnings per year.  Based on this metric or tool, Apple is a magnificiently operated cash flow machine that knows how to take earnings and make them into the real thing:  CASH!

I'm long Apple and suggest to all my readers that purchasing Apple under  $400.00 will be a rewarding experience over the next two years.

Time for some NFL... yeah baby, finally the football season is on!

(Reminder:  Check this blog's archives for other artcles.)



Steve M