Replies to post #3197 on The Rising Influence of Rising Affluence

[Dotsconnectors]

This loss of at least 2.4 million jobs in the 2000s, resulting from the actions of U.S. multinational alone is the poison a “tax-cut run amok” can produce and which can’t be corrected due the anti-tax pledges to Americans for Tax Reform (ATR).

This “tax-cut run amok” is the second destroyer of competitiveness cites in Dotsconnectors’ reply to a free trader’s review of Death by China titled “Surprised” at:

http://www.amazon.com/review/R1CLCBIO9V6SMH/ref=cm_cr_pr_viewpnt#R1CLCBIO9V6SMH

Relevant text relating to this grossly counterproductive tax-cut follows:

“The second is a change in U.S. Corporate Tax Regulations, dating back to 1997, which began allowing U.S. Corporation the deferral of payment of tax for foreign earnings, as long as those earnings were not returned to the United State. The result is not only the loss of U.S. tax revenue but also an incentive for the remove of capital and with capital the related jobs.”

This tax-deferral may ultimately rank as the most fiscally, economically and politically irresponsible tax incentive in the history of the republic.

[DewDiligence]

Attention, Shoppers! Blue-Chip Stocks Are On Sale

[Among the names mentioned in this Barron’s piece are XOM, CVX, PFE, MRK, MSFT, INTC, and JPM.]

http://online.barrons.com/article/SB50001424052702304183104576488481370158912.html

›The selloff leaves U.S. stocks at some of the lowest valuations in a generation, and at a time when corporate profits are healthy and balance sheets strong. The best asset class in the world?

AUGUST 6, 2011
By ANDREW BARY

After the recent plunge in major global markets, U.S. stocks look attractive.

The benchmark Standard & Poor's 500 index trades for little more than 12 times projected 2011 profits, one of the lowest price/earnings ratios in a generation. The Dow Jones Industrial Average has a similar P/E—11.6 times this year's estimated earnings. Its dividend yield of 2.62% exceeds the depressed 2.56% yield on the 10-year Treasury note, another rare occurrence.

This isn't the 1970s, when P/E ratios were low but inflation and interest rates were high. Investors are worried about different problems: a weakening domestic economy, Europe's debt mess, political dysfunction in Washington and a massive and seemingly intractable federal budget deficit. Yet American corporations rarely have been in better shape, with generally robust profits and balance sheets flush with more than $1 trillion in cash.

Analysts are loath to predict when the sell-off, which began July 22, might end, but many say they see stocks ending the year higher. If the S&P 500 merely gets back to its 2011 peak, set in April, the index would rise 14%. "The economy is doing well enough to keep earnings rising and bring some bullishness back to the stock market," says Jim Paulsen, investment strategist at Wells Capital. Management.

Investors have been rattled by the swift pace of the sell-off, in which the S&P 500 fell more than 10% in 10 trading sessions. This marks only the fourth such decline in a bull market since the end of World War II. The other three 10% drops occurred in late 1974, October 1997 (during the Asian crisis) and August 1998 (after the collapse of the hedge fund Long-Term Capital Management). The good news is that the market rallied an average of 18% in the ensuing three months after each of those three setbacks, according to J.P. Morgan strategist Thomas Lee.

Stocks might be near a bottom after a week of selling. The Dow finished Friday at 11,444.61, up 60.93 points in a volatile session but down 5.8% for the week. Most of the damage occurred Thursday, when the average fell 512 points, or 4.3%, its biggest point drop since late 2008. The industrials are down 1.2% for the year; they were up 10.7% at their April peak. The S&P 500 ended the week at 1,199.38, off 7.2% for the five days and 4.6% for the year [down 12.5% from the May 2011 high and up 80% from the Mar 2009 low].

The situation is worse overseas. The Euro Stoxx 50 index is down 15% this year, Japan's Nikkei is off 9% and formerly once-hot Brazilian stocks are down 24%. Every major European market except Switzerland has a P/E below 10, and European stocks yield an average of 4%.

Closer to home, the top 50 U.S. banks trade on average at around book value [but the balance sheets of large banks cannot be taken at face value, IMO]. They have been cheaper only twice in the past 25 years—during the deep recession of 1990 and the 2009 financial crisis. Both those times were major buying opportunities, and today, notes RBC Capital Markets analyst Gerard Cassidy, the industry's fundamentals are improving.

At 37.60 a share, J.P. Morgan Chase (ticker: JPM) trades below book value and for under eight times projected 2011 profits. [If I had to buy the shares of a big bank, this would be the one.] The stock yields 2.7%, which is likely is going higher. Citigroup (C), at 33.44, is down 29% this year and trades for less than 75% of book value of $48.75. Tangible book is a conservative measure of shareholder equity that excludes goodwill and other intangible assets stemming from acquisitions. Goldman Sachs (GS), at 125.18, trades just above tangible book, and Morgan Stanley (MS), at 20.02, changes hands below tangible book of $26.97.

A wobbly global economy poses risks for big financials, but the industry's capital levels are appreciably higher than in 2008 and leverage is lower. [But it’s hard to say what the true leverage is if you cannot take the figures on the balance sheet at face value.] It will be tough for most big financial companies to earn 15%-plus returns on equity in the coming years—a performance that was common before 2008—given higher mandated capital levels. But the stocks are priced for single-digit returns or worse.

Drug stocks, normally defensive, haven't done a lot to protect investors lately. Pfizer (PFE), at 17.49, trades for around eight times estimated 2011 profits [#msg-65791666], while Merck (MRK), at 31.71, has a similar P/E ratio. Both yield more than 4.5%. Government pressure on drug-cost reimbursements could escalate around the world, but that concern seems captured in drug stocks' low valuations.

Technology companies have more exposure to Europe than other stock-market sectors, but they also have excellent balance sheets and low price/earnings multiples. Microsoft (MSFT), at 25.68, trades for nine times estimated earnings for the fiscal year ending next June. Its P/E, excluding net cash and investments of $6 a share, is under eight. Intel (INTC), at 20.79, trades for nine times projected 2011 profits and yields 4%, while Hewlett-Packard (HPQ), at 32.63, fetches less than seven times current-year profits. Apple (AAPL) the market's premier mega-cap growth stock, at 373.62, trades for 14 times what it is likely to earn in the fiscal year ending September. Excluding $80 a share in cash and investments, its P/E is closer to 10.

In the energy sector, many investors prefer exploration plays and oil-service stocks, but the best value could lie in industry giants like ExxonMobil (XOM) and Chevron (CVX). [I agree; in the oil patch, I like XOM, CVX, HES, and CLB.] At 74.82, Exxon trades for under nine times projected 2011 profits and yields 2.5%, while Chevron, at 97.61, has a P/E of just seven based on estimated 2011 net. It yields 3.2%. The recent drop in U.S. oil prices to $87 a barrel from $100 could pressure profits, but the stocks look to be discounting far lower oil and gas prices.

The prospect of cuts in the Pentagon budget has crunched defense stocks. Northrop Grumman (NOC), for instance, now trades at 55.49, down from 70 in early July, and sports a P/E of eight. It yields 3.6%. Lockheed Martin (LMT), another major contractor, trades for 72.82, or 9.7 times earnings, and yields 4%.

Gold has been a bright spot, rising $36 an ounce last week to $1,663.80. The metal is up 17% so far this year. Gold is shining because investors fear that the U.S. government will continue to pursue policies—notably zero-percent rates and massive fiscal deficits—that will further debase the dollar and spark inflation. Gold remains an "underowned" asset class with few individuals and institutions with a sizable weighting, which could mean more buying.

While gold has gained, major producers have lagged. The leading miner, Barrick Gold (ABX), is down 14% this year to 45.86, and trades for just 10 times estimated 2011 profits. Gold bugs weren't happy that Barrick paid up to buy a major copper miner earlier this year, diluting its exposure to gold. There is rumored to have been heavy selling of Barrick by some institutional investors in recent months. Even so, Barrick has rarely had such a low P/E and its profits have a lot of leverage to gold prices.

Berkshire Hathaway (BRK-A, BRK-B) is a financial Fort Knox, with one of the strongest balance sheets among huge companies. Its shares have been no safe haven, falling 11% this year to $107,300, or just 1.1 times book value. Berkshire looks inexpensive with a price/book ratio that has rarely been lower in recent decades. Its earnings power has never been better. Berkshire CEO Warren Buffett has been cool to stock buybacks– the company has repurchased virtually no stock since he took over in 1965–but he ought consider a buyback rather than paying cash for another major acquisition, given Berkshire's low valuation.

Stocks had a tough summer in 2010 as the S&P 500 dropped 15% from its spring high to a low of about 1,050 in late August. That proved to be a buying opportunity as Federal Reserve Chairman Ben Bernanke came to the rescue with a new credit-easing program, known as QE2. By the end of 2010, stocks had risen 20% from their August lows.

While the Fed is more reluctant to begin a fresh asset-buying plan this year, stocks look even cheaper than they were last summer. Historically, it has been good to buy the stock market when its trades around 10 times earnings. Barring global financial mayhem, investors with a modicum of patience should do well. Stocks could be the best asset class in the world.‹

[DewDiligence]

US-Based Multinationals Emerge Leaner, Stronger—and Hiring Overseas

[See #msg-65512988 and #msg-69267035 for related stories.]

http://online.wsj.com/article/SB10001424052702303815404577331660464739018.html

›April 8, 2012, 9:14 p.m. ET
By SCOTT THURM

Big U.S. companies have emerged from the deepest recession since World War II more productive, more profitable, flush with cash and less burdened by debt.

An analysis by The Wall Street Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the recession and financial crisis.

Deep cost cutting during the downturn and caution during the recovery put the companies on firmer financial footing, helping them to outperform the rest of the economy and gather a greater share of the nation's income. The rebound is reflected in the stock market, with the Dow Jones Industrial Average at a four-year high.

"U.S. companies became leaner, meaner and hungrier," said Sung Won Sohn, a former chief economist at Wells Fargo & Co.,

The performance hasn't translated into significant gains in U.S. employment. Many of the 1.1 million jobs the big companies added since 2007 were outside the U.S. So, too, was much of the $1.2 trillion added to corporate treasuries. Two-thirds of Apple Inc.'s $82 billion in cash and marketable securities as of Sept. 30 was held by foreign subsidiaries, for example.

The Labor Department said Friday that employers added fewer jobs than expected in March, reigniting concerns that the economic recovery would stall again. Much of Europe is in recession and growth is slowing in China. Even before Friday's report, analysts expected earnings from S&P 500 companies to rise 9% this year, down from 15% last year.

Overall, though, the Journal found that S&P 500 companies have become more efficient—and more productive. In 2007, the companies generated an average of $378,000 in revenue for every employee on their payrolls. Last year, that figure rose to $420,000.

Consider Agilent Technologies Inc., a Santa Clara, Calif., maker of scientific equipment, that was suffering from the shock of the economic crisis. In 2009, the company laid off 4,000 employees, or 20% of its work force, as revenue plunged 22% and the company posted a loss.

When revenue began to rebound in 2010, Agilent resumed hiring—but primarily outside the U.S., in countries such as China and Brazil. Last year, Agilent's revenue was 22% higher than in 2007, boosted by its 2010 acquisition of Varian Inc. But Agilent employs fewer people than in 2007, even after absorbing Varian's work force. And Agilent had more than $3.5 billion in cash on Oct. 31, 2011, nearly twice as much as four years earlier.

But hiring? That's another matter. Chief Executive Bill Sullivan says he remains "very, very cautious" about hiring while the recession's scars are fresh. "That's a lesson current leaders of industry will not forget," he says.

The Journal's analysis is based on data gathered by Standard & Poor's Capital IQ from corporate filings with the Securities and Exchange Commission. The analysis includes the 468 companies of the current S&P 500 that have reported financial results for last year.

The analysis also found a rebound in capital spending, that is, spending on new plants and equipment. Agilent, for example, boosted capital spending more than 50% last year, to $188 million from $121 million.

For the S&P companies as a group, capital expenditures rose 19% last year, more than double the 9% increase in 2010. The sharper increase brought capital spending back to 5.8% of total revenue for the companies in the Journal's analysis, equal to its level in 2007.

Analysts say the recovery is favoring big companies, like those in the Journal's analysis. Many smaller companies are struggling to stay competitive or to obtain financing.

"It's a real winners-versus-losers phenomenon," says John Graham, a professor of finance at Duke University. Mr. Graham directs a quarterly survey of chief financial officers, with CFO Magazine. The March survey found that finance chiefs of companies with revenue of more than $1 billion were significantly more optimistic about the U.S. economy and their own companies' outlooks than their counterparts at smaller companies.

The Journal's analysis may overstate the health of American corporations by looking only at the companies that survived the recession.

Some of the growth in revenues and earnings resulted from mergers. The analysis excludes former titans like Lehman Brothers Holdings Inc. and Circuit City Stores Inc., which failed or Anheuser-Busch Cos., which was acquired by a foreign rival.

Many companies continue to struggle. Revenue at home builders is less than half the peak levels from the last decade. Medical-device maker Boston Scientific Corp. has shed more than 3,000 jobs since 2007, but its revenue continues to decline and the company posted losses in four of the past five years.

A Boston Scientific spokesman declined to comment.

One reason for optimism among bigger companies is their global reach, which helped many cushion the impact of the recession.

Revenue at McDonald's Corp. and Starbucks Corp. declined in 2009, then rebounded on strong sales outside the U.S. At McDonald's, international revenue rose 24% since 2009, three times as fast as in the U.S. At Starbucks, international revenue jumped 35% the past two years, more than double the 14% increase in the U.S.

The two consumer companies also boosted profit margins by closing locations during the recession and adding menu items. Such moves are spawning considerable amounts of cash. McDonald's spent $24 billion to pay dividends and repurchase shares since 2007—and still boosted its cash holdings 18%, to $2.3 billion.

Foreign corporations also are looking at the U.S., pushing American companies to be more nimble globally. When Chief Executive Paul Bisaro arrived at generic-drug maker Watson Pharmaceuticals Inc. in 2007, virtually all of its manufacturing was in the U.S. Mr. Bisaro bought a U.K. drug maker, closed factories in North America and moved half of Watson's manufacturing to India, in part to be closer to non-U.S. customers.

Mr. Bisaro kept four U.S. plants to make Watson's most sophisticated products, installing new equipment and retooling the manufacturing process. In 2007, the company's Davie, Fla., factory used 866 employees to crank out one billion extended-release pills and capsules. Last year, 937 workers produced 2.5 billion items.

Watson was sheltered from the worst of the recession—its annual revenue never declined—and could add employees while becoming more efficient. Other companies didn't have that luxury.

Revenue at Union Pacific Corp. plunged 21% in 2009 as the recession cut railroad shipments. Union Pacific idled locomotives, shut rail yards and eliminated more than 4,000 jobs—roughly 10% of its work force. By last year, revenue rebounded to 20% above the 2007 level. But Union Pacific still employs 10% fewer workers than before the recession.

A Union Pacific spokesman says the company plans to increase capital expenditures this year "to focus on customers' logistics needs as well as our own operating efficiency."

Such efficiency moves are essential for companies. But economists warn that improved efficiency and continued executive caution are slowing the recovery.

"What's best for an individual firm may not be best for the overall economy," says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.‹