Tuesday, September 8, 2009

Bought 40 Anika as Lottery Ticket/What Will Produce Growth after the Age of Leverage?/Cheney & Fox/

On the NBC Nightly News last night, I heard a woman say that she did not want Obama talking to her children about abortions and gay marriage, her version of two Obama beliefs which she did not share, and consequently would not allow her child to listen to the President's address to the school children. Another man quoted in the WSJ this morning referred to the speech as propaganda based on what he has read on the internet, an unlikely reader of the New York Times no doubt. WSJ.com So, now I understand the concerns of the TBs. The Beanpole wants to turn our grade school children into socialists & supporters of abortions and gay marriage. The Governor of Texas understands why parents would want to keep their children home as an alternative to listening to the President's speech. Wow, what can you say other than it is best to start training the TBs early in life to avoid any contact with information inconsistent with opinions formed without much if any accurate information, an agenda of the GOP Tribe since Spiro Agnew. Form the opinion first and then seek out people like the Clown in Chief for information confirming the opinion, avoiding all "mainstream" media sources as unreliable purveyors of socialist and other evil forms of propaganda. There is nothing consistent with True Conservatism in this approach, but something else entirely.

1. Age of Leverage: Growth can be achieved with borrowed money and even sustained with leverage as long as lenders are willing to extend even greater amounts of capital until the chickens come home to roost. For the past thirty years or so, it has been an article of faith that tax cuts, primarily for the wealthy, will generate growth, create more jobs, and lead to economic prosperity. This argument was advanced to justify the Bush tax cuts from his first term, and its truth is held with such ardor rarely matched by even the most fervent religious zealots. But, how much of the growth was occasioned by the tax cuts compared to the vast extensions of credit to consumers, and the deficit spending of the federal government? To me, at least, it is an interesting question.

By 2007, the ratio of household debt to disposable income increased to 133%, up from around 90% a decade earlier. The following linked chart shows this ratio hovering at around 60% between 1961 to 1985, when an unmistakable change occurred in the American consumer's willingness to spend and unwillingness to save. invescoaim By 2001, the ratio had increased to 97% and then to 133% by 2008. The ratio was fairly constant at less than 40% in the 1950s. Total household debt doubled between 2000 and 2008, rising to a staggering 13.8 trillion in 2008: USATODAY.com A corollary to the increased consumer borrowing and spending was a decrease in the savings rate, where personal savings as a percentage of disposable income ranged mostly in the 8 to 12% range between 1961 to 1985 and then started to fall eventually into negative territory as shown in Figure 3: https://www.invescoaim.com/pdf/ConRec.pdf Growth caused by consumers becoming over leveraged is at best temporary, an illusion of sustainable growth. It also seems to me that the consumers willingness to increase debt and to decrease savings corresponded with the U.S. government becoming more fiscally irresponsible, as shown by the growing budget deficits starting with the Reagan administrations. As Dick Cheney said (Taxing), Reagan taught us that deficits do not matter and it is that attitude which started to gather steam in the 1980s, furthered by politicians of both parties and a growing belief in a right to receive something for nothing, or without paying anywhere near its full cost, and ended with the leverage implosion in 2008 and the near meltdown of the world's financial system.

The government's deficit spending has been increasing dramatically since the early Reagan years. In 1980, the entire U.S. debt, accumulated since the founding of the country, was 909 billion. United States public debt The current year's deficit will just about double that number. The debt grew from that 909 billion in 1980 to 3.206 trillion in 1990 and to 5.628.7 in 2000. By the end of 2010, the figure will probably creep close to 14 trillion. This can be tracked at a U.S. Treasury web page: Debt to the Penny (Daily History Search Application)

As a result of a SEC rule change in 2004, investment banks were allowed to increased their leverage from 12 to 1 debt/equity, and many increased their leverage to as 30 or even 40 to 1, using some of the increased borrowings to fuel the rise in subprime lending. (see item #2: LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK; & Continuation of Prior Post from Last Night: 2004 SEC Rule Change)

Excessive leverage can create growth in GDP. How do you separate that growth from the growth caused by other factors such as a cut in the tax rate or increased productivity resulting from technology like advances in computer technology since the early 1980s or the development of the internet? Even with the Bush tax cuts, and the parabolic extension of credit during his second term, job growth was anemic during the Bush years, with the WSJ pointing out that job creation during the Bush term was the worse since records started to be kept. Bush On Jobs: The Worst Track Record And many of the jobs created were in construction based clearly on the improvident and reckless expansion of credit rather than other factors. More Meanderings on Corporate Tax Rates & THE Multitude of Factors Impacting Growth

An interesting article about the Age of Leverage, written in 2008 by Niall Ferguson (a Harvard history professor and Senior Fellow at the Hoover Institute at Stanford, can be found at vanityfair.com.

I am not sure that I see an engine for growth to replace excessive borrowings by both consumers and governments. The culture of receiving something without paying for it is still in full bloom. And if you bring this subject up, you will receive scathing criticism, mostly off point, as shown in the comments to this article in U.S. News & World Report: (usnews.com).

2. German Industrial Orders: Industrial orders rose a greater than expected 3.5% in July, led by a 10.3% rise in domestic orders. This rise came after a 3.8% rise in June.

3. General Electric (owned): J P Morgan raised GE to overweight from neutral and increased its price target to $17 from $12.

4. Cheney and the Fair and Balanced Network: One way for the Fox news channel to prove, at least for one time their famous moniker of being fair and balanced or even that there is one real journalist in their midst, would be to actually confront the Dark Force with an inconvenient fact or two, inconsistent with his spiel, when he sits down for the next "interview". Maybe one of the faux blondes or the cream puff Chris Wallace (at least when interviewing a GOP Tribe member) could watch some footage from a Tim Russert interview to see how to confront a politician from either Tribe, then maybe the interviewer could be forced fed a few facts and have someone frame a few tough questions to ask. I understand that actually confronting a GOP tribe member with a few tough factual type questions will cause the TBs to howl in protest. That would be proof after all of bias to mention a fact or two. But, maybe Wallace could at least do a better job of pretending to be a real journalist for at least one interview with Cheney in the future. ( The Daily Dish Transcript FOXNews.com NYTimes.com)

I am curious myself, for example, how the torture of Mohammed stopped a terrorist plot to attack Los Angeles in 2002 when Mohammed was not captured until 2003. The FBI's chief interrogator, Ali Soufan, pointed this tibit out in a recent column in the NYT: NYTimes.com Soufan also maintains that nothing in the recently released CIA documents support the Dark Force's claims that the "enhanced interrogation" techniques stopped a single attack. The Director of the FBI, who would be in a position to know and who is certainly not a pathological liar incapable of telling the truth, claimed that no attacks were stopped with information gained through those techniques. vanityfair.com Soufan points out that false information was gathered by torture. And a "seasoned" FBI counter-terrorism agent was quoted in that Vanity Fair article as stating that the torture produced a lot of false leads and "bullshit" which caused a waste and exhaustion of the FBI's time.

5. Time Periods for U.S. Recessions and U.S. GDP Charts: I found this table of the time periods of prior U.S. recessions at the St Louis Federal Reserve web site: St. Louis Fed: Economic Data - FRED: Help The same information is available at NBER (National Bureau of Economic Research):Business Cycle Expansions and Contractions

This is a link to a bar chart of the growth in U.S.GDP since 1930: St. Louis Fed: FRED Graph If you did not know when Clinton and Bush Junior were presidents, could you identify when the Republicans or the Democrats were in power based solely on the information contained in that chart? In 2000 the GDP in billion of dollars was at 10,000 and had grown to slightly over 14,000 by 2009. In 1992, GDP was about 6400 and had grown to 10,000 by 2000. Which 8 years had the better growth in percentage terms? St. Louis Fed: FRED Graph Does it really make much if any difference which party is in power? Is tax policy or growth in consumer/government debt/spending more important? Unless we forget, the national debt rose from 900 billion to 2.8 trillion under Reagon. Reaganomics

6. British Jury Convicts 3 Muslims of Plot to Murder Civilians: I remember reading about this particular mass murder plot at the time of the terrorists' arrest. It involved a plan to smuggle liquid explosives on civilian airliners bound to the U.S. and Canada, and then blowing the planes up killing a couple of thousand people. msnbc.com WSJ.com There is concern that a terror attack may be launched in Germany in connection with the upcoming elections similar to the mass murders committed in Spain in 2004: Newsweek.com

7. Tidbits: KRAFT: There are a number of reasons why I do not care for Kraft's bid to acquire Cadbury, besides the likelihood of Kraft paying too much. Large mergers certainly do add revenue and fulfill the goal of some chief executives to become empire builders. Given the cost it is difficult to see any real advantage to existing shareholders, and frequently they signal a failure to improve the business organically. Pfizer: Wyeth acquisition as more proof of Pfizer's failures The path to increasing shareholder returns is through improving margins, developing new products and extensions of old ones, and smaller acquisitions where new products or technologies can be acquired and expanded with the resources of a larger corporation. I will sell me Kraft shares if and when I can receive more than $27.5 a share. I will keep them only if KFT abandons this effort. On the positive side, this bid has caused at least a temporary rise in some of the other food stocks which I own including Campbell Soup and Heinz.

Microsoft: I have dozens of reasons for switching to Apple computers from the Windows operating system several years ago, though I do keep one Windows system to navigate a few sites like FINRA that are unfriendly to Apple. I would just highlight one reason which is fairly typical in my view about Microsoft. About a week ago, the Microsoft Entourage email program, part of the Office suite for Apple computers, cease to work with Microsoft's hotmail: Error Code 18597. It works with all other email programs. Now, it is virtually impossible to secure any assistance in fixing the problem or to even find out its source. As it turns out, it is a widespread problem that has not been fixed for a week now. I learned that piece of information by doing a google search. And besides the inability to fix the problem for a week, I thought to myself that this is a Microsoft product unable to work with another Microsoft product.

8. Bought 40 shares of Anika Therapeutics (ANIK) -Lottery Ticket (SEE DISCLAIMER): So, I wrote a column about the need to pare my lottery ticket positions, noting that 30 small positions was not worth the trouble of tracking, and this morning I add LT position #31 by buying 40 shares of Anika at $6.45. I could not buy 50 shares due to the $300 maximum for each of these speculative LTs. The current consensus earnings estimate for Anika is $.5 for 2010, and $.34 for this year. ANIK: Analyst Estimates for Anika Therapeutics The company was found using a a YF screen with the criteria of cash per share of greater than $3, price below $10, debt below 20m, and a PEG of less than 1. The five year PEG is estimated at .6, P/B is 1.2, cash per share is $3.248, & P/S is 2.03.

I do not have access to any analysts' reports. And, I have no way to gauge the potential revenue growth of Anika's products or the likelihood of it securing FDA approval for its Monovisc for the treatment of osteoarthritis of the knee. The stock did move up on a percentage basis recently, as Anika filed more documents with the FDA and a competitor's drug received a thumb's down vote from a FDA panel: Reuters Monovisc has already been approved in Canada.

Anika's products and devices promote the repair, protection and healing of bone, cartilage and soft tissue, according to Anika, based on a naturally-occurring compound called hyaluronic acid. A summary of existing products can be found in Anika's last 10-Q: /www.sec.gov/ The company is already profitable earning 13 cents per diluted share for the first 6 months of 2009.

The last 10-q does show 13.6 million in long term debt. The company explains in note 10 of this filing that it drew down an unsecured credit agreement to finance new facility construction.

The cash is shown at 39.549 million as of 6/30. Netting the cash with the long term debt results in a net cash figure of 25.949 million. The market cap of the company is currently 74.34 million as shown on the YF page based on around a $6.5 price per share: ANIK: Summary for Anika Therapeutics Inc.

I am staying out of trouble with these LT purchases since it is impossible for me to get into any meaningful trouble even if all of them went to zero. And, I have been usually lucky with them this year, so far at least. Evaluation of Lottery Tickets so far in 2009

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