Streetwise
Lauren Rudd
Sunday, January 24,
2010
A Poor Choice of Words
A reader recently forwarded to me a disturbing video of Erin
Burnett on CNBC. Burnett referred to the actions by the Federal Reserve of
adding liquidity to the economy in an effort to stimulate lending, and those by
the Treasury Department of issuing debt to finance the deficit, brought on in no
small part by our military actions abroad, as a Ponzi scheme.
Although Burnett used data from a report by Pacific
Investment Management Company (PIMCO), let me make it clear that nowhere in the
report did PIMCO ever use or refer to the term Ponzi scheme.
To quote from the PIMCO January report, “Without a healthy
financial sector, capital may not re-circulate into the private sector.
Governments and central banks will likely want to ensure the banking industry is
able to increase lending to the private sector, so government support programs
should remain in place until banks heal. The Federal Reserve will likely keep
monetary policy highly accommodative to allow banks to increase profits and
build equity capital.”
Let me point out that the Federal Reserve is set to end its
purchase programs of both Treasury and mortgage backed securities in March of
this year. Furthermore, the Fed chalked up a profit of $52 billion in 2009, as a
result of its investments, of which about $46 billion was returned to the U.S.
Treasury to help offset the deficit.
To conjure up images of the Federal Reserve and the Treasury
Department in the same light as Bernie Madoff, while the country deals with the
debilitating effects of the current recession, is the height of ignorance and
insensitivity. Furthermore, the implication is baseless and without merit.
As a nation we have elected to engage in conflicts that have
had a monetary price tag of in excess of a trillion dollars. Such an undertaking
can be financed with deficits, increased taxes, or a drastic cut in social
programs. Congress has elected to take the deficit path, leaving it up to others
to raise the necessary funds.
To make matters worse, over the years the country has
suffered through a savings and loan debacle, the October 19, 1987 stock market
crash, the failure of Long Term Capital, which took its own shot at bringing
down the economy, the dot.com bubble, the housing bubble and now the remnants of
an era of toxic mortgage backed securities. Yet no substantive action is ever
taken by Congress. In fact, exactly the opposite has been the case.
For the past 8-10 years financial industry regulations have
either been abolished or watered down to the extent where enforcement becomes
laughable. Among the most detrimental acts was the abolishment of the
Glass-Steagall Act. Nonetheless, the Fed is now being criticized for not being
stringent enough in protecting the economy from the follies of Congress.
The recent notoriety surrounding Wall Street’s obscene
profits comes less than a year after their avarice brought about near ruination
of the economy and the need for a taxpayer bailout. Yet, Congress refuses to
implement the necessary restraints to control those that periodically wreck
havoc.
Meanwhile, Goldman Sachs, Wall Street’s poster child of
gluttony despite being quoted as, “Doing God’s work,” pointed out that the
recent win by a Republican in Massachusetts will likely result in healthcare
stocks rallying. In its opinion, managed-care stocks, such as Humana, are
expected to post the largest gains with pharmaceuticals close behind.
If I had to pick an ensuing pharmaceutical winner, it would
be Merck. The shares are up over 11 percent this year alone. Merck’s intrinsic
value using a discounted free cash flow to the firm model is $81 per share,
while a discounted earnings model yields an intrinsic value of $55 per share.
The shares recently closed at $41.03.
My 2010 earnings estimate is $3.62 per share with a 12-month price target on the
shares of $45, for a potential capital gain of 10 percent. There is also an
indicted dividend yield of 3.9 percent.
