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Philip Mause
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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
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  • Apple Is Still Dirt Cheap At 10 Times Earnings

    Apple (AAPL) released its earnings after the market closed Tuesday and held its quarterly conference callseekingalpha.com/article/52441-apple-s-ceo-discusses-q2-2012-earnings-call-transcript . There has been the usual euphoria because of the enormous growth in sales, revenue and earnings and, although AAPL closed at $560.28, after market activity suggests that it will see a big pop on Wednesday. All sorts of analysts and wannabe analysts are again touting AAPL as a growth stock and the results certainly support that. What continues to amaze me is that AAPL is actually trading at levels that do not "bake in" any expectations of growth at all.

    I analyzed AAPL back on January 25 when it was trading at $420.41 a shareseekingalpha.com/article/321930-apple-is-very-very-cheap-at-less-than-9-times-current-earnings . I used my EPEE method, backing out balance sheet cash to determine what an investor is paying for the enterprise itself. Since then, AAPL has continued to build up balance sheet cash. As of the end of the second quarter, balance sheet cash was some $110 billion or $116 per fully diluted share. I have tried to estimate current fiscal year's earnings per share by taking the earnings for the first two quarters - $26.17 - and adding the earnings as forecasted by AAPL for the third quarter (even though AAPL always underestimates its future earnings) - $8.68 - and then assuming that the fourth quarter equals the third quarter (although earnings have been sequentially increasing) to get earnings of $43.53 for the current fiscal year. This number is almost certain to be considerably below the actual earnings AAPL achieves this fiscal year.

    Subtracting balance sheet cash of $116 a share from the closing price of $560, an investor is actually paying $444 a share for the actual enterprise of AAPL. This is coincidentally almost exactly 10 times current year earnings. To put this in perspective, the Dow Jones Utility Index is now trading for more than 16 times current earnings. AAPL is not really trading like a growth stock - it is trading like a stock in a declining business like dial up internet or landline telephone service.

    I have developed a method for evaluating dividend stocks which provides a premium for dividends because I think most shareholders place a higher value on green goods than on retained earnings. Using this method, I multiply AAPL's current dividend of $10.60 by 20 and get $212, then I add $116 for balance sheet cash, and then I multiply retained earnings of $32.97 by 14 to get $461.58 producing a total of $789.58. Do I think that AAPL will close at that level this week? Of course not, but I do think that below that price AAPL is a reasonable buy in this interest rate environment. Remember people called me crazy three months ago when I was pounding the table at $420 a share - read some of the comments.

    APPL has taken steps to enhance shareholder value by instituting a buy back program ($45 billion over three years) and a quarterly dividend (which will very likely increase steadily). What is interesting is that the cash necessary to fund these measures will still leave AAPL with a substantial build up of balance sheet cash. AAPL's balance sheet cash increased by some $45 billion in the twelve months ending at the last day of the second quarter; the annual dividends will cost roughly $10 billion and the buy back will cost an average of $15 billion a year, leaving $20 billion in "extra" balance sheet cash - making the ridiculously conservative assumption that there is no acceleration in the cash generated by AAPL's business as we move forward. This constant cash build up on top of the $110 billion AAPL already has will support higher dividends and, perhaps, an even bigger buy back program.

    Bear in mind that I have made many, many conservative assumptions in putting these numbers together - essentially assuming no growth at all as we move forward. Arguments can be, and have been, made that some of the balance sheet cash is overseas and that taxes would have to be paid if it were to be repatriated. But it is also true that some of the best opportunities to invest that cash may be right where it is - likely in Asia. This stock gives an investor a big margin for error at this price level. It will almost certainly pop up starting Wednesday based on the strong earnings; a good way to look at it going forward is that every $43 above $560 is another 1 times current earnings ($603 is 11 times earnings, $646 is twelve times earnings, etc.). Needless to say, I am still very bullish on this stock which is available at these cheap prices only because a number of investors must disagree with me.

    Disclosure: I am long AAPL.

    Tags: AAPL, long-ideas
    Apr 26 9:35 AM | Link | Comment!
  • The Moron's Guide To Macroeconomic Policy: Interest Rates, Fiscal Policy And Inflation

    I have been reflecting upon the ebbs and flows of the economy over my lifetime and the various policy tools used to modulate those changes. While a furious debate still rages about Keynesian economics and there are clashes concerning Greenspan's legacy, it seems that a few points are inescapable and may give us a good guide book for policy in the future.

    There is general consensus that we would all like a world with low or no inflation and high real GDP growth. Of course, the problem is that as the economy picks up momentum, bottlenecks emerge and prices rise producing inflation. Over time, due to these bottlenecks and "inflationary expectations" prices tend to rise simply because they have been rising in the recent past - indexing contributes to this. I can vividly remember the late 1970s when employees were insulted when they got a 10% raise because they weren't keeping up with inflation.

    Most of the time it seems that Federal Reserve interest rate policy is sufficient to prevent explosive inflation and to stimulate the economy when it is slowing down. Indeed, in the early 1980s, Paul Volcker's high interest rate policy brought inflation under control - even though the federal government was running enormous deficits at the time. In a similar manner, a lowering of interest rates can generally stimulate the economy and produce an increase in real GDP with a lag time.

    The fine tuning of this mechanism is sometimes described as the Taylor Rule which posits an an ideal federal funds rate based on inflation and "slack" in the economy measured by comparing actual and potential output. Other economists have proposed variations on the formula (the Mankiw version is the one I am most familiar with) but the general approach is clear. When inflation and capacity utilization are high, interest rates should be high. When inflation and capacity utilization are low, interest rates should be low.

    It is interesting that, so far, we haven't confronted the issue of fiscal policy at all. It appears that interest rate policy can reduce inflation even if the government is running a big deficit - that certainly seems to be the lesson of the Reagan years. This may have led some politicians to conclude that "deficits don't matter" and that kind of thinking can have some pernicious effects. The government shouldn't spend money wastefully - whether it is running a deficit or running a surplus - and a cavalier attitude toward deficits certainly opens the door to wasteful spending. But that is a problem of government efficiency - not necessarily a problem of inflation or macroeconomic policy.

    Anyhow, the problem with interest rate policy is that, although interest rates can theoretically be raised to infinite levels, there is a limit to how far they can be lowered - zero is pretty much the bottom. And in a severe recession with deflation or very low inflation, the Taylor Rule (and its variations) implies a negative interest rate. Another way of stating this is that, under certain circumstances, the Taylor Rule suggests that a zero interest rate is too high and will slow down the economy further and create additional deflation. Of course, this is the exact opposite of what most of us would want to see happen at the bottom of a recession and so we have a problem.

    It would seem that under the unusual circumstances when the Taylor Rule suggests an interest rate below zero, fiscal policy has a legitimate role to play and that countercyclical deficit spending may be necessary. To be sure that the spending does not simply "crowd out" private sector investment, the government debt necessary to support the spending should be monetized by expansion of the Federal Reserve's balance sheet. In simple terms, the Federal Government should simply print more money and spend it.

    Once the Taylor Rule suggests that a zero rate is appropriate, then the deficit spending may be less necessary and macroeconomic policy can return to its primary reliance upon interest rate policy of the Federal Reserve. The Federal Reserve's decision about when and whether to reduce its balance sheet by selling the bonds it acquired should depend upon inflation and not upon any concern that the government must "pay back' the money it borrowed.

    There is no symmetrical need to run a surplus at times of high inflation because there is no limit to how high interest rates can be raised and therefore the government's fiscal policy over a long period of time will have a "deficit bias." This will tend to lead to wasteful spending and other measures must be adopted to guard against this.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 22 6:40 PM | Link | Comment!
  • Barrons Supports The Issuance Of Consols

    Since shortly after the financial crisis began, I have advocated that the United States Treasury issue consols - perhaps entering the market slowly by first issuing 50 year and 100 year bonds. Consols were issued by the British government in the 19th century and are perpetual bonds - the principal never has to be paid off. The investor appetitie for long term paper would support a market for these securities and they would help clarify the debate about the national debt which, in my view, never really has to be "repaid" (there, I said it). If the Fed bought consols we would then have a situation in which the Treasury simply made interest payments to the Fed and the Fed periodically remitted the money to the Treasury. To the degree that inflation reared its ugly head, the Fed could soak up liquidity by selling some of its consols. It would become clearer that inflation and not the need to "pay the debt off" is the real issue associated with deficit spending.

    An editorial in Barrons has now suggested that the Treasury consider issuing consols and I expect that, very gradually the idea will pick up momentum and may someday be part of the "conventional wisdom - of course, by that time the market window for issuing them may be closing. I expect that by the time the Treasury actually issues consols it will probably be a bad idea considering market conditions.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 16 2:14 PM | Link | Comment!
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