Tuesday, February 10, 2009

CXW/P & G/Misuse of the CBO Analysis of Short & Long Term Impacts of Stimulus Package/

I recently bought 50 shares of Corrections Corporation of America (CXW). ADD of Corrections Corp of America (CXW) with cash flow     Corrections Corporation Mention in Barrons/Small Caps and RVX modelThe company reported a 16% increase in earnings this morning on a 8.8% increase in revenues.  Yahoo! Finance
CXW earned 32 cents compared to 28 cents in the quarter a year ago. This beat the consensus estimate by two cents.  For the full year CXW earned $1.20 compared to $1.06 in 2007. Corrections Corporation of America Announces Fourth Quarter 2008 and Full-Year Financial Results: Financial News - Yahoo! Finance
However, the stock has declined  over 15% in early trading this morning due to the lowered forecast for the next quarter as well as 2009.  Reuters For the first quarter, the company is guiding to $.24 to $.26 and to $1.1 to $1.2 for the year which would be flat to down 10% compared to 2008.  The decline is due in part to higher depreciation cost resulting from 587 million in projects placed into service in 2008.  The other negative impact is higher interest expense from the borrowings used to finance this expansion. 
Those two negative factors trim ten to twelve cents from the 2009 outlook.  The company is trimming its 2009 capital expenditures compared to 2008, limiting cap expenditures to  132.1 million because of a lack of clarity about the absorption of prison beds by their customers.   One reason for easing into a position is that I have funds to invest at lower prices.  I will add another 50 to bring the total position up to 100 shares on an opportunistic basis, depending on how far the price falls today.  I am tempted to add 50 shares today at the current prices.  My hesitation has more to do with this next story than the lowered forecast.  

In a related story about prisons, Reuters is reporting that federal judges are tentatively ordering California to release up to a third of it prison population to relieve over crowding.  Reuters
California is just one of many states where the state government is refusing to align spending and tax policies.  I believe that its debt is now the lowest rated state debt, tied with Louisiana.   Los Angeles Times

There is an article in Weekday Trader at Barron's written by Alexander Eule that makes the case for buying P & G now.
 Barrons.com  This may be true,  but anyone buying now would have to be committed to the position for the long term, possibly for three to five years, to reduce the risk of buying shares now.  Since I have limited myself to investing cash flow or proceeds from a sale pursuant to my VIX asset allocation model, I will have to wait to buy a 100 shares.

This is a link to an analysis by the non-partisan PolitiFact service on how the GOP is distorting the CBO conclusions about how soon the stimulus plan will have an effect on the economy.PolitiFact | Many choices for CBO numbers for 2009 and 2010  I am in a constant source of amazement why vast numbers of American citizens accept as true words coming out of any politicians' mouth, Democrat or Republican, without making an effort to verify its accuracy.

One favorite tactic of those in the business of misleading others for ideological reasons is simply to omit facts contained in a document that is the subject of their discussion which, if disclosed, would make their argument less persuasive. I view it as important to read the source documents prior to even considering forming an opinion.   The use of a CBO analysis contained in a copy of a letter sent to Senator Gregg provides an example of this tactic.   A copy of the entire letter can be read and compared with the comments made by those who ideology is apparent whenever they discuss any substantive issue. Congressional Budget Office - Estimated Macroeconomic Effects of the Inouye-Baucus Amendment in the Nature of a Substitute to H.R. 1   I found it to be an interesting analysis of the short run and long term impact of the proposed stimulus bill.  It is about what I would expect.  I found it interesting to compare the conclusions in the entire CBO letter, including the large positive short term impacts on job growth and GDP resulting from the stimulus bill and the estimated very slight adverse long term impact, with the comments made by Noel Sheppard at NewsBusters.org   And then anyone can arrive at their own judgment about any bias in Mr. Sheppard's analysis.
Another example of someone who distorts what is in the report by leaving out the details, thereby creating a false impression in service of his ideology, is contained in an article written by James Pethokoukis for U.S. News & World Report.(usnews.com).  In fairness to Mr. Pethokoukis, he does include a link to the CBO letter.  Here are some facts and figures directly from the letter that Mr. Pethokoukis omits from his quotes.  First, as to the long term impact that he is troubled about:

"Including the effects of both crowding out of private investment (which would

reduce output in the long run) and possibly productive government investment

(which could increase output), CBO estimates that by 2019 the Senate legislation

would reduce GDP by 0.1 percent to 0.3 percent on net"

The CBO letter refers to this impact as slight. 

Then the letter discusses the shorter term impacts: 

"CBO has developed a range of estimates of the effects of the Senate legislation on

GDP and employment that encompasses a majority of economists’ views.

According to these estimates, implementing the Senate legislation would increase

GDP relative to the agency’s baseline forecast by between 1.2 percent and

3.6 percent by the fourth quarter of 2010. It would also increase employment at

that point in time by 1.3 million to 3.9 million jobs, as shown in Table 1. In that

quarter, the unemployment rate would be 0.7 percentage points to 2.1 percentage

points lower than the baseline forecast of 8.7 percent. The effects of the

legislation would diminish rapidly after 2010. By the end of 2011, the Senate

legislation would increase GDP by 0.4 percent to 1.2 percent, would raise

employment by 0.6 million to 1.9 million jobs, and would lower the

unemployment rate by 0.3 percentage points to 1.0 percentage point."

So, if someone wants to make a point about this letter, please do not deliberately distort what the CDO is saying just to further some ideological crusade.  It is always humorous to see such distortion created by those claiming to expose bias. The real question is whether the significant and favorable short term impact is worth the possible long term slight adverse impact.  I would add that the short term is more predictable than what may happen in 2019. 

Another distortion, which I am not going to discuss today, is the claims made about the cost per job created by the spending portion of the bill.  Suffice to say, you have to align the jobs per year with the expenditures for that year.  Another issue is to take into consideration the fact that employee costs are a fraction of the total cost to build a needed infrastructure project or a new school that would otherwise be built when funding would become available. 

I saw a story that Nissan was cutting 20000 jobs worldwide.   GM announced that it is cutting 10000 jobs this year.  WSJ.com

There was an article in the WSJ this morning about European investors cutting way back in buying debt issued by governments and companies located outside their home nation.    WSJ.com

This could have an impact, assuming the trend continues, on the U.S. ability to finance its trillion + dollar deficits in the coming years. 

Cisco sold about 4 billion in bonds to add to its cash.  Interest rates were favorable for it. Cisco will be paying  just 4.979% for a ten year note and 5.916% for a 30 year.  WSJ.com 

This sounds to me that Cisco is up to something.  I would also point out the relevance of this event to my discussion relating to AT & T calling the underlying bond contained in JZV and JZJ.  

UBS continues to lose money.   Yahoo! Finance   I am paying attention to UBS only because I am considering buying one or more metal ETNs issued by it, and I have to take into consideration its financial position because an ETN is in reality just a debt obligation of the issuer.  

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