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The latest numbers coming from China indicate that its nascent economic recovery is starting to gather real strength. Latest flash PMI manufacturing data showed that manufacturing activity improved, as the reading reached its highest number in just over a year. The HSBC Markit survey preliminary manufacturing PMI for November was 50.4, compared to last month’s final reading of 49.5. The flash number for November is the highest reading in 13 months. A reading above 50 signals expansion, so this was yet another encouraging indicator that China’s economy was headed in the direction of recovery.

HSBC Markit Flash China Manufacturing PMI

Source: BusinessInsider.com

The HSBC Markit flash PMI is a preliminary survey that is usually released after three weeks into the month, with the data revised and finalized after the month is concluded. The HSBC Markit flash survey as well as its finalized version is known for producing lower numbers in its results than China’s official government survey, which is in large part attributed to data for the HSBC Markit survey coming from the smaller, private businesses. The larger state owned businesses surveyed in the official government survey tend to do more robust business so reflect higher numbers. The official government survey for October showed manufacturing expansion increased for the first time in three months.

Seeking Confirmation

The market will seek confirmation in the manufacturing PMI numbers when the HSBC final numbers for the month come out on December 3rd, two days after the government’s official survey for the month is scheduled to be released. But it looks like a good bet that both the HSBC Markit survey and the official government PMI manufacturing readings will both exceed 50 for November. The recovery, or at least the end of the economic slowdown, actually began to show itself with inklings in September data, which were followed by more promising numbers in October. Although the tenor of some of analyst opinion and financial reporting still saw the possibility of further slowing if not a hard landing in China up until recently, the last couple of months’ data has quelled most of that talk. The predictions of any upcoming quarterly GDP annual growth rates sliding beneath the 7 percent mark has also been put to rest.

China GDP Annual Growth Rate

Source: Tradingeconomics.com

An Arrested Slowdown

The economic slowdown in China, which had lasted for seven quarters, was met with several fiscal and monetary measures by the government in Beijing, though some critics charged that not enough tools were used nor were they used fast enough.The bank reserve ratios were lowered early in the slowdown, back as early as late 2011, to free up money for lending by the big banks, while benchmark interest rates were lowered later. These remedies took time to take effect, as lending was sluggish for much of the year. Monetary supply increase via liquidity injections was also one of the tools employed, especially after the bank reserve and interest rate cuts had been put in place. Rather than cutting interest rates further, policymakers seemed to prefer going down the money supply avenue. The fall infrastructure and construction stimulus package was yet another approach with a domestic spending angle. Since then, the liquidity injections have continued and the goal of more lending has been pushed, though with still spotty results. Beijing’s leadership insisted their careful approach, what they characterized as “prudent, fine tuning,” would work in time. Whichever of these methods worked or worked better than others, the economy started to heal in advance of China’s leadership change, setting up a timely rebound.

China New Export Orders

Source: AlsoSprachAnalyst.com

Additional Indicators

There were other strong indicators beyond the main manufacturing number in the latest HSBC flash report. The output sub-index rose to 51.3, which was also a 13 month high. For the first time in more than six months, new export orders rose, and this was at the fastest rate of increase in two years. A gain in new orders overall, which totals both exports and domestic demand, follows the strong increase in October.The ratio of new orders to inventories continued to be high, which indicates that industrial production growth will increase over the last official measure in September. Most of the preliminary data looks highly encouraging, and although it doesn’t establish a trend yet, the more positive data that keeps appearing, the greater the likelihood is that China’s economy will be on its way back.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

China Petroleum & Chemical Corp. (NYSE: SNP), known as Sinopec, recently agreed to buy a 20 percent stake in a Nigerian oil field from Total, SA (NYSE: TOT) for $2.5 billion. The purchase is part of Sinopec’s ongoing plan to aggressively add to its overseas assets, while the deal for Total represents the continuation of its recent strategy to shift its asset mix with more frequent adjustments to its business portfolio. The deal for the portion of the Nigerian field contains part of the Usan field, a field which started production early this year, and the block which Sinopec purchased produces 130,000 barrels a day of oil equivalent.

A Nigerian Oil Field

Source: Business Financial Post

Nigeria is the largest crude oil producer in Africa, but the country has been plagued by frequent violent attacks from rebel groups on oil company equipment and personnel. In addition, problems stemming from natural events such as severe flooding have compounded the difficulties of operating there. Recent floods have caused lower oil production despite the rich reserves. Sinopec, however, has been eagerly adding foreign assets, including some from the US as it extends its reach to become a truly global company. Although Nigeria’s National Petroleum Corp. holds the rights to the oil block purchased by Sinopec, designated as OML 138, Sinopec joins other partners such as Chevron Nigeria (NYSE: CVX), Exxon affiliate Esso Nigeria (NYSE: XOM), and Nexen Petroleum (NYSE: NXY) with interests in the block.

Sinopec’s Other Moves

Sinopec, the dominant refining company in China, is attempting to diversify its interests to include more exploration and production to round out its asset base. Earlier this year, Sinopec purchased Canadian natural gas and oil producer Daylight Energy for approximately $2.1 billion. Sinopec also invested $5.2 billion in Portuguese company Galp Energia’s Brazilian Petrogas Brasil interests. Sinopec also purchased a $1.5 billion, 49 percent stake in Talisman Energy (NYSE: TLM), another Canadian exploration company, in July. The deal was expected to be completed by year’s end.The Talisman Energy assets are largely oil and liquids production in the North Sea, but there are also Southeast Asian assets in the deal as well. A further $2.2 billion joint venture for a 30 percent interest in five shale plays of US company Devon Energy (NYSE: DVN) shows the outreach of some of Sinopec’s acquisitions.

Sinopec Six Month Chart

Source: Yahoo Finance

China’s Energy Expansion

The other Chinese majors, PetroChina (NYSE: PTR) and CNOOC (NYSE: CEO), have also been active across the globe. The strategy of acquiring overseas assets hasn’t been simply a one company approach or a corporate strategy, but is part of a wider strategy of Beijing’s policymakers which the oil companies are carrying out. China is a massive consumer of oil and energy products, and despite the amount of production domestically, with many of its own oil fields already mature, it needs to continue to pursue an overseas thrust.

CNOOC is currently in the process of trying to purchase Canadian company, Nexen Energy, a deal which has seen some opposition by Canada’s government. Recent concessions to the Alberta Premier, Alison Redford, may have ironed out the final wrinkles in what would be a $15 billion purchase. The three China oil majors have found Canada, with its oil sands and its natural gas fields, an attractive place for joint ventures, partnerships and alliances. Not all has gone smoothly, however, as in addition to the CNOOC-Nexen deal holdups, PetroChina and Encana (NYSE: ECA) eventually failed to reach terms on what would have been a $5.5 billion partnership on shale gas in western Canada. But the allure of attractive assets and willing partners or sellers will continue to bring the already hunting Chinese majors into the foreground.

China’s Oil Production And Consumption

Source: US Energy Information Administration

Sinopec Eyes More

Earlier in the year, Sinopec was reportedly interested in dealing for what might be as much as $10 billion of Chesapeake Energy’s (NYSE: CHK) assets.The speculation was due in part to Sinopec’s deal with Devon and its shale plays, as Chesapeake was apparently in the market for heavy divestiture, while Chesapeake shale plays would complement Sinopec’s Devon stakes. But Sinopec keeps moving, regardless of the outcome of the deals. Sinopec, along with others, has been interested in French oil and gas explorer Maurel & Prom, which apparently is seeking either a partner or to be acquired a larger company. Sinopec continues to be on the alert around the globe for assets that can both benefit its bottom line and bring more energy to China.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

Occasionally some companies will declare a special dividend, which often ends up being a nice bonus for investors. After all, you may own a stock for its regular dividend or perhaps for its dividend income along with some capital appreciation, but when a company throws extra cash your way, that’s something unexpected and one of life’s positive surprises.With the near certainty of dividend tax rates about to go up—it’s a question of how much, not if—dividend investors have been paying even stricter attention to what goes on with their stocks. Top tax rates on dividends may rise from the current 15 percent to as much as 43.4 with the affordable healthcare act tax included. In less than just the last two months, about four times as many companies as usual have announced special dividends, with several stating they did so to get ahead of the upcoming likely tax rate changes.

Maximum Dividend And Capital Gains Tax Rates

BusinessInsider.com/Goldman Sachs

Cash Stacks

Corporations have amassed roughly $3 trillion in cash and are figuring out how to use it. Earlier in the year AOL (NYSE: AOL) paid a hefty special dividend, and Tyson Foods (NYSE: TSN) announced it would pay its first special dividend in more than three decades. Another company that made a big splash was casino operator Wynn Resorts Ltd. (Nasdaq: WYNN), which recently paid out $750 million in a special dividend. The total payout comes to $8 per share, which includes the regular $0.50 per share dividend. CEO Steve Wynn pointed out that higher tax rates may discourage companies from paying dividends, as they’ll instead use the cash in other ways. Sheldon Adelson, CEO of rival casino company Las Vegas Sands (NYSE: LSV), on the other hand, announced plans to raise its dividend and is still an enthusiastic proponent of dividends.

Wynn was one of the bigger names to pay out the extra cash, but some smaller companies did as well. A regional bank, Kansas City’s Commerce Bancshares (Nasdaq: CBSH), with a $3.5 billion market cap, declared a $1.50 per share onetime payment on November 2nd. While Wynn’s company has paid special dividends in the past, this was a first for Commerce Bancshares and its happily surprised investors.

Accelerated Dividends

The current 15 percent tax has been the rate on dividends since 2003, when the Jobs and Growth Tax Reconciliation Act was passed. This was passed during President Bush’s administration, with most tax cuts originally set to expire in 2010, but the cuts were extended through 2012. With this law due to expire January 1st, dividends would then be taxed at the rate of ordinary income. In addition to those companies which have decided or are considering paying a special dividend, some other companies are moving up their payment date. The most widely known of these is Wal Mart (NYSE: WMT). The Wal Mart board of directors decided to move up the payment of its fourth quarter dividend to December 27th of this year, ahead of its regularly scheduled payment date of January 2nd, 2013.

Some companies are so eager to return shareholders some cash that they’re simply declaring the payments before they’ve even worked out the details. National Beverage (Nasdaq: FIZZ), announced that it will pay a special dividend that will range from $1.50 to $3.00 per share, and that it would likely be paid in the calendar year 2012 so that taxpayers can take advantage of the tax laws of the current year. National Beverage doesn’t pay a regular quarterly dividend, but it has often paid special dividends when it accumulates what it considers surplus cash.This small cap stock has been something of a powerhouse, with strong shareholder returns. Its CEO, Nick Caporella, not only writes some of the most creative and entertaining company news releases, but he’s also a savvy manager who’s historically been a committed owner, which helps explain why he’s shareholder friendly.

National Beverage Corp. Five Year Chart

Source: Yahoo Finance

Shareholders As Owners

While many are predicting the demise of dividends due to the upcoming tax increases, such a view doesn’t square with the history of dividend paying stocks and investing. There will no doubt be a period of adjustment, possibly a wrenching one. Many of the companies paying special dividends have a management that has considerable skin in the game. Caporella at National Beverage controls 75 percent of its shares, while Steve Wynn remains Wynn Resort’s largest shareholder.

There may be a flurry of more special dividend announcements, or at least companies pushing their payment dates back to this year’s calendar. For the special dividends, in addition to strong insider ownership as one factor, companies with good balance sheets and cash flow, and most of all, a pile of surplus cash, will be candidates to reward shareholders with some of it.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

China’s outgoing president, Hu Jintao, made a wide-ranging speech at the Communist Party Congress, which outlined much of what the country’s economic agenda will be going forward. Hu highlighted the need for China to expand its domestic market, along with this he touched on the need to increase consumer demand, as well as increase incomes. Hu restated a target to double household incomes in the next ten years. Speaking about China’s financial system, the outgoing party chief called for greater development of the country’s capital markets, as well as gradual pursuit of more market based interest rates and renminbi exchange rate. The eventual goal of promoting the renminbi’s convertibility would then come into focus.

China’s Outgoing President Hu Jintao

Source: Google Images/bbc.co.uk

While the outgoing president’s speech was enthusiastically received by delegates, it broke no new ground nor did it address the specific timetable of when the goals would be reached. Both President Hu and Premier Wen Jiabao have been speaking to these themes over the past several months, if not years. Analysts saw the importance of the speech on one level, however, as it comes as a restatement in the face of what has been a protracted economic slowdown. The reaffirmation of growth targets, while the numbers haven’t changed, may be important for delegates, many of whom are also industrial and economic leaders, as was the reaffirmation of policy as well.

A Further Context

President Hu and Premier Wen have, in the last couple of years, and publicly during the economic slowdown, used the opportunity to address some longer standing issues for China’s economy. Some of the text of Hu’s speech was couched in the language of reform, but Hu was evoking a specific kind of reform. It is economic reform directed at solving problem areas previously and publicly identified by Hu and others in China’s leadership group. Two of the biggest issues often cited by both Hu and Wen were that China’s economy is structurally out of balance and that it has featured unsustainable growth. A remedy translates into a long term shift from the heavy dependence on exports and fixed asset investment toward internal demand and consumer consumption. There’s been no secret about this.

If anything, the year’s economic slowdown has been a vivid illustration of these problems. While some China analysts have debated the true accounting of its export trade as a component of GDP, when Europe had its near economic nervous breakdown as it finally was forced to begin to come to grips with the eurozone debt crisis, China felt the brunt of the continent’s massive downturn as China’s export partner. This is a situation that on a practical basis China knew it had to change, and still knows this, though that is a very long term project indeed. Likewise, shifting from spending on fixed assets—despite the recent infrastructure project boost, must one day be less of a force in the economy as the years and decades advance, if China’s economy is truly going to develop properly. The consumer must play a larger role.

China’s 18th National Communist Party Congress

Source: Google Images/ibitimes.com

Difficult Tasks

What Hu spoke of and China realizes it must do and has set out for itself to do, won’t be easy. There has been some economic pain in their developing, as happens in all economies, and there will no doubt be more. In addition to raising household incomes, China’s leadership has also pointed to the need to address a widening income gap. These are not simple fixes.As a developing country, China’s industrial production must also continue to move up the value chain, not only to develop more sophisticated industries—especially in technology, but also to avail more opportunities for its people to fully participate, as workers, innovators, and entrepreneurs. To do so, however, will require much attention to a massive scale of the many proverbial moving parts that make up the second largest economy in the world. While the problems have been identified and the goals clearly stated, some of the methods and timetables of achieving the aims aren’t yet clear. No doubt much will be left to the presumptive successor, Xi Jinping, as he assumes the role of head of the party, then later as president. China has made striking economic progress in the last several decades. It looks as though Xi will now be put in a powerful place to wrestle with its considerable future.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

Nearly lost amid the pre election and post election haze of commentary in the financial media, were some other things of interest to investors. While the commentators on the business channels on tv can make even the smallest event seem apocalyptic, they were predictably manic about the election. For investors, though, you really had to go elsewhere to get or dig into other real investing news. While the presidential election was of course important, history tells us, hysteria aside, that the stock market has flourished and floundered both under both Republican and Democratic administrations, and though it’s important to pay attention to the concrete political developments that emerge from elections, it’s also a historical note to remember that money can be made in virtually any kind of market, no matter what party occupies the white house.

A Strong Earnings Story

One of the interesting items nearly buried in the pre-election coverage was the earnings results of one of the most widely held dividend stocks, AT & T (NYSE: T). On October 24th, the company reported diluted EPS that was up from $0.61 in the year ago third quarter, to $0.63 in this year’s quarter. Nothing much at first glance to get excited about there. But as often with earnings, it pays to dig around a bit. In AT & T’s case, you don’t have to dig very deep to find some nuggets. The company produced record cash from operations of $11.5 billion and free cash flow of $6.5 billion in the third quarter. Space limitations here prevent a full analysis of the company and its earnings, but such cash generation is always an attention getter.

AT & T 1 Month Chart

Source: Yahoo Finance

A Changing Industry

A couple of things to note about AT & T also. It recently raised its quarterly dividend a penny to $0.45 a share, which gives it an annualized payment of $1.80, for a current yield of 5.31 percent at the stock’s recent price of $33.87 per share. Many investors have held AT & T as a sleepy dividend stock, a tradition going back to its roots decades ago in much quieter investment times. But telecom, though a rich dividend playing field, is a changing game. One of the notes in AT & T’s earnings report was that it is going to invest $14 billion in the next three years to accelerate its development of 4G LTE coverage, in a move to keep pace with rival Verizon Communications (NYSE: VZ). The ongoing intensive capital investment in the battle for higher and higher wireless stakes has made telecom anything but a sleepy industry.

AT & T, VZ, S & P 500 1 Year

Source: Yahoo Finance

Dividends And Fundamentals

With the rapid changes occurring in the telecom industry, driven by the advent and now dominance of wireless, investors can see an entire industry has changed before their eyes in the last few years.That’s why it’s so necessary to watch the stocks you own. While investors used to buy a portfolio and simply collect the dividends, they are better served today by watching for ongoing developments. As the saying goes, you can buy and hold, but add watching to that, watching very carefully.

Fundamental changes within industries and sectors happen, and of course, companies change, too. Even bellwethers. A company in the market’s crosshairs right now is McDonald’s (NYSE: MCD). This is a stable giant and a dividend stalwart, which currently yields 3.6 percent and is a name many individual investors comfortably own. The market has taken down the stock, which recently closed at $84.74, as it has flirted with new 52-week lows and is well off its high of $102.22. The double whammy of what Zack’s Investment Research labeled a “dull” third quarter, with EPS down to $1.43 from $1.45 a year ago, and revenue off 0.2 percent, began the slide. A couple of weeks later, the October same store sales numbers came out which showed a 2 percent decrease in domestic same store sales.

McDonald’s One Month Chart

Source: Yahoo Finance

During the stock’s sell off, which may not be over, some financial commentators nearly buried the company. It had previously always been able to perform well and keep growing, even in slow economic times, but many say this time it’s different. Yet if you dig into the earnings report, the third quarter numbers were strongly affected by currency exchange rates. McDonald’s does about 40 percent of its business in Europe, so that is a drag. Whether McDonald’s will recapture the magic it’s always had on the domestic side as the US economy sputters along, is a call investors will have to make. The likelihood is that McDonald’s will right itself, but its results show that nothing these days, even for the big blue chip dividend payers, is automatic, nor should be taken for granted. Investors need to stay vigilant to book profits.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

After the tantalizing improvement in China’s economy signaled by September’s numbers, the good news for China continued. October’s numbers showed a further rise in economic activity, as the country begins to emerge from what had been a persistent slowing of growth. Improvements in infrastructure investment and factory output were indicators of the beginning of an economic recovery gaining traction, as factory output was the strongest in nearly half a year.

China Export Growth

Source: alsosprachanalyst.com

One of the key areas of China’s economy, the hard hit export trade, saw the second straight month of encouraging growth, as exports grew by 11 percent.This followed a surprisingly strong reading in September, when exports increased by 9.9 percent. The all-important export trade accounts for about one-third or more of China’s economy. Many analysts were unsure as to whether the rise in September’s export trade would be followed by a strong October. China’s economy has been an export driven economy for years, and its economic slowdown was initiated by the weak export trade with its main partner, the eurozone countries. China had been trying to diversify its trade more to the US and the rest of Asia, including other emerging markets. China’s Commerce Minister Chen Deming was quoted in a Reuters article as being cautious on the data, however, as he termed the recovery “mild,” and added that the 10 percent target for full year exports would be difficult to achieve.

Other Strong Data

Industrial production for the month of October grew at a 9.6 percent rate, while retail sales grew 14.5 percent. Fixed asset investment spending increased 20.7 percent for the first ten months of the year, though the growth of new projects started is in the 30 percent plus range in the last couple of months. Fixed asset investment, which had been responsible for about half of GDP growth this year, was expected to continue to be strong due to the government’s fast tracking $157 billion in infrastructure and construction projects announced in the early fall. Industrial production growth had been lagging, and the consumer, viewed as an especially critical component in the economy by Beijing when the export trade was lagging, showed renewed strength. Both the infrastructure spending and the consumer spending speak to the issue of internal domestic demand, one of the key components the government is attempting to address for not only its short term but longer term goals of restructuring the economy.

China Industrial Production

Source: Tradingeconomics.com

Some of the other data was not only positive, but remarkably encouraging. Consumer inflation only increased 1.7 percent over October of last year, and was less than September’s year over year rise of 1.9 percent. This was despite the monetary easing with several interest rate cuts the government had enacted. A series of reserve loan requirement rates were lowered for the big banks beginning a year ago, which was estimated to have made available nearly $200 billion into the economy for lending. Also, two benchmark interest rate cuts as well as attempts to boost monetary supply were part of China’s easing and stimulus measures. Growth has been spurred but inflation, always a worry on the minds of Beijing’s policymakers, remains tame.

China Retail Sales

Source: Tradingeconomics.com

A Beginning

The caution expressed by China’s government officials is echoed by most analysts. While some economists are gearing up GDP growth forecasts of higher than 8 percent for 2013, the consensus is more of a wait and see view. Growth for the fourth quarter may exceed a 7.5 percent rise in GDP, but there are still areas such as corporate earnings which have been lagging and will take time to rebound. This is particularly true in some of the larger SOEs, those in the industrial and commodity areas that have seen some still high input prices pressure selling prices, which caused profits to fall.The falling producer prices and their impact on corporate earnings will take some time to be fully reversed. China’s policy moves, which have been part of its gradualist response to the slowdown, appear to have begun working through China’s economy in a meaningful way.

China Stocks

Equities in China, which have seen values held down in the domestic market in Shanghai and other Greater China exchanges, have been showing promising signs notably on the ADR front. US investors who have carefully been searching for value in Chinese shares have been able to have some success. With the direction of China’s economy improving, now what remains is to see how consistent this accelerating growth will be. Many companies on the domestic front, in consumer intensive sectors, should feel the benefit first. And although neither China’s economy nor its equities will see a rise that’s straight up, the October economic data shows a promising direction.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

By the time investors will read this, the presidential election will have taken place. Much speculation has centered around what will happen to dividend investing with the strong possibility that tax policy changes will take place for investors. The current tax policy of a 15 percent rate on both dividends and capital gains has been thought to be likely to change no matter which candidate won the election. The campaign proposals of both candidates included changes, with both Gov. Romney and Pres. Obama drawing the dividing line for taxpayers at an income level of $250,000 for those filing joint returns and $200,000 for those filing as a single payer.

The proposals by Obama and Romney differed, as Obama proposed an increase on the capital gains tax to 20 percent for the earners above the dividing line, while leaving the rate at 15 percent for those below. Romney’s proposal was to tax the higher earners at 15 percent, while not taxing capital gains for those with incomes lower than the $250,000/$200,000 level. As for dividends, Obama proposed to tax the higher earners at 39.6 percent, the top marginal rate for ordinary income. The proposals by the candidates illustrated the sharp differences between the two candidates and their parties on taxing investments. Romney and the Republicans believe that lower taxes will spur investment, while Obama and the Democrats’ position was that higher earners should pay a larger share of government expenses.

Complicated Change

Even with the election over, however, as in most things financial, it’s not quite clear or simple as to how the changes will unfold. In a note released the day before the election, Goldman Sachs’ (NYSE: GS) David Kostin said in a view many analysts share, that investment tax rates were due to rise no matter who won. With the fiscal cliff as well as the Affordable Care Act, which adds a 3.8 percent tax on top of investments, the capital gains tax would rise to 23.8 percent and the top marginal rate to 43.4 percent, should the Obama proposals be adopted. This would be regarded as the worst case scenario for investors, as Kostin thinks it more likely that both capital gains and dividend taxes will rise to 23.8 percent. Others think there may be further adjustments, with the possibility of a different income dividing line or maintaining two different rates based on different income levels.

Dividend & Capital Gains Rates

Source: Businessinsider.com/Goldman Sachs

What Will Investors Do?

It’s always a tricky thing—sometimes futile, for investors to try to anticipate the actions of Congress concerning investment laws and even tax policy, even after an election. But what many investors historically have done, Kostin points out, is when investment tax hikes occurred for 1970 and 1987, they sold off holdings in the preceding Decmebers in 1969 and 1986. December, usually a positive month for the market, saw a negative return on the S & P 500 for those months, as investors sold to lock in the lower tax rates.

Dividend Policy Changes

There is the potential, if companies feel that whatever new tax rates might be enacted will negatively affect investor sentiment on their stock, that companies may change their dividend policies. In the extreme, some companies might eliminate their dividends, or more likely, dividend growth and increases might be slower. Buybacks might be favored more over dividends. Two groups of investors, the wealthiest as well as retirees who depend on dividend payments for their sustained income—and these two groups may be partially different but aren’t necessarily mutually exclusive, may find dividend investing less attractive. Although longer term, the capital gains rates and dividend tax rates have not historically been shown to dramatically alter dividend investment behavior on a large scale, the impact is most noticeable and felt when changes in the tax rates initially take place.

Post Election Market Returns

Source: businessinsider.com/Goldman Sachs

For Dividend Investors

So what should you do? Unfortunately, the consensus was that investment taxes would rise no matter which candidate won, so it might be a matter of how much, not if. If you invest in dividend paying stocks as either a large or small portion of your portfolio, you shouldn’t panic and make dramatic changes. There has been a lot of warning about these potential changes, so it should have given investors or their CPAs or other tax planners enough of a heads up to assess the situation in light of their personal investing needs, strategies and investment mix.Watching and waiting for now, then making prudent adjustments might be the best strategy.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

The US presidential election just concluded wasn’t the only important leadership of a world superpower in focus, as rising superpower China is now embarking on its determination of its future leadership. While most investors are at least somewhat aware of the upcoming leadership transition, about to be decided at China’s 18th Communist Party Congress, there are some direct connections between the two events.

China’s Likely Next Leader, Xi Jinping

Source: GoogleImages/China.org.cn

While the two processes have obvious great differences, there are elements of leading the two very different countries that at least echo each other. Both President Obama of the US, who won a highly contentious re-election campaign, and current Vice President Xi Jinping, who is the presumptive next president in China, will have to not only satisfy their different constituencies, but also both will have to manage their economies through what is a continuing global slowdown. In the case of Pres. Obama, there are also domestic financial issues with debt, deficits and spending he along with the US Congress must address.

For Xi Jinping, the domestic side of China’s economic issues involve reviving or keeping a strong enough growth rate while dealing with readjusting some of the components of China’s vast economy. Notably, Xi will have to keep an eye on Europe, China’s export partner and the catalyst for the global slowdown with its ongoing debt problems, while undertaking the difficult task of re-balancing China’s internal economy to reflect more domestic demand. In addition to this, both China and the US will have to come to grips with relations with each other. This area has seen some contention in the recent past.

US President Barack Obama

US President Barack Obama

Continuity

Xinhua, the official news agency of China, released commentary on the US election which indicated at least relief that the US will have continuity of leadership with Obama’s re-election. Continuity and stability is something highly prized in China, as this is both a concern and a theme in China’s leadership transition.While China will have a new leader in Xi, it also values the stability of this leadership handover as a clear signal that Xi’s leadership will be in the lineage of his predecessors. In China, the view is for Obama to take a more benign policy toward the country, as China is eager to have some of the issues between the two countries de-fused.

Issues, Policy And Rhetoric

Xinhua spoke of a lack of trust which has arisen between China and the US during Obama’s first term. China and the US sparred verbally over trade issues, with WTO disputes on subsidies and dumping in the solar and steel industries, along with long-standing currency issues, as well as the more recent disagreements over the accusations of possible high-tech commercial espionage. Beijing, for its part, feels trust eroded with the Obama administration’s sometimes harsh talk on these issues, as well as the notable security assertion with military overtones last year that the US would focus its attention on the Asia-Pacific region. During the US election campaign, China grew more nervous with the harsher rhetoric of Obama’s Republican opponent, Gov. Romney, who promised a tougher stance on China in trade and currency matters. Whether this type of China talk was merely campaign rhetoric, grist for the election mill by both candidates or not, part of Beijing’s relief is that the tough talk may at least be taken down several notches in the post election days.

Finding Common Ground

The Xinhua commentary urged that the US “should start to learn how to build a more rational and constructive relationship with China.” It also pointed out there’s something clearly in it for the US, as with stronger ties between the two countries, it can be especially beneficial in trade, as this can provide lucrative opportunities for the US and can contribute to the health of its economy. The tone of the official commentary was conciliatory, as it likely expresses the view of the new China leadership in waiting.
As often happens, countries and policies may move on a human scale. The persona of Xi Jinping shouldn’t be underestimated. President designate Xi has shown what are regarded as favorable inclinations to the US, with his visit last year and his previous personal experience. Obama has a chance to seize a historical moment and not only forge better ties with China now, a pragmatic exercise, but also has a chance with Xi to set in place a much stronger relationship for the future. By all indications, China’s leaders are and will be eager and hopeful for a more dynamic, constructive relationship with the US, but they don’t view this as a given. President Obama will have to do his part.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

On the face of it, stock buybacks look like good things. After all, the company is investing its cash in the company itself. If that isn’t a vote of confidence, what is? The company usually repurchases outstanding shares and retires them. Investors then own a larger stake proportionately in the company, and that includes things like a larger portion of earnings. The market often reacts to stocks which announce buybacks by pushing up the share price.

These can be good strategic moves for companies, particularly those that have excess cash. Investing in the company itself can strengthen shareholders’ investment, and this is often considered the best use for cash. Contrast this with companies that have squandered their capital with bad acquisitions, often on businesses that don’t mesh with their core business, which can seriously affect the value of the company and the worth of the shareholders’ investment.

Are Buybacks Always A Good Thing?

But what about when share buybacks either don’t work or are not even the best use of a company’s capital? After all, shareholders are interested in the best return for their investment. For dividend investors, which can include anyone from pure income only investors to those investors who buy shares in stocks of companies that provide a combination of yield and capital appreciation, the share buyback, particularly if it’s instead of a dividend or in lieu of dividend growth, can be a less attractive alternative.

Example Of Financial Ratios And Stock Buybacks

Source: Investopedia.com

Bad Deals

The most notable scenarios when stock buybacks aren’t good for investors are when the company buys shares to spin its financial results.Very simply, when shares are bought and retired, there are fewer shares outstanding, so earnings per share improves. Of course it improves without actual improvement in the business, or net income, as it’s just a way of tweaking the financial arithmetic to make things look better. All the financial numbers calculated on a per share basis, such as cash flow per share and so on, look better, but of course they aren’t. The obvious financial engineering not only fails to improve the business’ fundamentals, but after a while, even this won’t help lower and lower earnings.

Not only is the cash not going,for example, to dividend investors via a dividend increase, but there’s another less obvious reason for buybacks: to prop up share value for executive compensation. With many executives receiving significant compensation in the form of stock options, the buyback artificially inflates the EPS and pumps up the value of the options. Again, meanwhile, the shareholder, hungrily awaiting a dividend or a dividend increase—actual, tangible cash, gets the short end of this deal, in this case nothing.

Costco Stock Repurchase Vs. Dividend

Source: SeekingAlpha.com

Buying Back Overvalued Shares

Another maddening aspect of the stock buyback, even if it’s executed otherwise as a reasonable way of deploying the company’s cash in a fundamentally healthy, growing company,
is when a company executes its stock repurchase program at unfavorable prices. One of the otherwise excellent companies that’s done this is Costco Wholesale (Nasdaq: COST), which purchased far fewer shares in their stock buyback program in 2009 when its share prices were lower, compared to buying back more shares more recently at a higher price. Another otherwise good company that’s done something similar is 3M (NYSE: MMM).After the severe market break in 2009 it effectively nearly ceased buying back its shares which it had been repurchasing before the crisis. Buybacks resumed in force after 2009, but a problem was the share price, which bottomed at nearly $40 during the financial crisis, eventually rose back to the $80 to $90 range. So the buybacks were executed at higher share prices rather than lower ones.

3M Stock Buybacks Vs. Share Price

A Question Of Value

While investors and companies can disagree which approach is better, for dividend investors, there is probably a bias toward value. That is, the company’s fundamentals are paramount, so the financial engineering and gimmicky buybacks should be met with due scorn. When a shareholder receives a dividend, he or she has the option of reinvesting it, saving it, or spending it on something else entirely. It’s real, actual cash in hand. Most investors, and particularly dividend investors, prefer this. If companies, such as Coca Cola (NYSE: KO), which grows its earnings and revenue solidly over time, pays a steady, growing dividend, and want to add share buybacks into the mix, as it has successfully done, then that’s a combination most investors will happily accept.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst

China’s overall government strategy of piling up additional energy and other resource assets while consolidating certain industries is ongoing. China watchers know that this has shifted into high gear in the last couple of years, with China’s major oil and gas companies notably reaching both overseas and domestically for joint ventures and acquisitions.Two of the latest well known deals proposed, CNOOC’s (NYSE: CEO) $15 billion buyout offer for Canada’s Nexen Energy (NYSE: NXY) and Sinopec’s (NYSE: SNP) attempt to snare China Gas Ltd. (384.HK) for $2 billion, traveled very different routes toward their outcomes.

CNOOC Five Year Chart

Source: Yahoo Finance

Cnooc’s offer for Nexen Energy has been met in some Canadian quarters with a burst of strident nationalism, reminiscent of the US reaction to Cnooc’s proposed buyout of US-based Unocal for $18 billion in 2005. Eventually, nationalistic fervor and some drum beating in Washington effectively killed the Unocal deal. That the proposed Nexen Energy deal, now several years later, would evoke such feelings in calm Canada is somewhat surprising.Yet there were cries that security interests needed to be considered as Canadian officials weighed the purchase.

A Soap Opera Drama

With the Sinopec attempt to buy China Gas, which has recently been rebuffed, there unfolded a tale of what was mostly intramural friction. China Gas didn’t want to sell to Sinopec, though the offer itself was unique, a hostile takeover attempt by a state owned giant, Sinopec, for another domestic company. The Sinopec attempt was highlighted by something of a drama with the personalities of the two main companies. China Gas’ founder, Lu Minghui, who had battled corruption charges and had been in prison, then under house arrest, built a strong natural gas distribution company in the last decade and was cleared of charges. Sinopec, known for its oil refining, wanted to get more into gas distribution. Its chairman, Fu Chengyu, had been at the helm of Cnooc when it was rebuffed in the Unocal deal.

Nexen Five Year Chart

Source: Yahoo Finance

Deal Complications

In the Nexen-Cnooc deal under consideration, although it appears that Canadian opposition to the deal has been diminishing, a seemingly unrelated event, Malaysian state owned oil company Petronas’ (5681.KL) $5.2 billion deal for Canada’s Progress Energy (PRQ.TO) has been rejected by Ottawa. This was a stunning reversal. Petronas had expected—indeed, had reason to believe, given the Conservative Party’s pro-business stance, that the deal would go through. Canadian prime minister Stephen Harper has been inviting foreign investment into the country, with many joint ventures and alliances already operating between Canadian and foreign energy firms, notably in the oil sands region. As no reason was given for the turndown of Petronas’ offer, the rejection of the Progress Energy deal was seen as a useful precedent, a way of the government keeping its option open to reject the Nexen-Cnooc deal should it wish to.

More Unexpected Turns

In the struggle for China Gas, the company had some large shareholder allies, including Korea’s SK Holdings which had more than a 15 percent stake, and Beijing Enterprises (392.HK), which raised its stake to more than 20 percent. More surprising was that Beijing Enterprises (392.HK), a large government-owned company, added to its stake in China Gas and effectively opposed another large SOE, Sinopec. After much wrangling, the deal with Sinopec fell through, although there appeared to be a face saving agreement to develop natural gas reserves as well as liquefied natural gas (LNG) together.

Uncertain Outcomes, Certain Direction

Although Sinopec’s offer was rebuffed by China Gas, Sinopec has been making other deals and will go on from here no doubt and make more. It has purchased some Chesapeake Energy (NYSE: CHK) assets and has been involved in joint ventures, alliances and other acquisitions.The move to strengthen its domestic natural gas position will likely continue. As for the Nexen-Cnooc deal, despite the rejection of the Petronas bid, most analysts are convinced that Canada will approve Cnooc’s purchase. Nexen’s asset mix, though it’s Canadian based, has mostly non-Canadian assets, so this perhaps will lessen the concerns of Canada’s government officials. Regardless of how these particular deals go, investors should note that the thrust of Beijing’s strategy for its energy companies is to expand outward while at the same time to consolidate and strengthen itself domestically. This means more acquisition and consolidation.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst