Chingo De Dinero

One important aspect of outstanding shares which I think many people miss is a simple math problem.

What is better for earnings per share…10% earnings growth, or 10% reduction in outstanding shares?

The answer the buy back. The reason why, when you calculate the percentage, you use the original amount for the denominator, so when the amount is decreasing you get different results then when it is increasing.

What sparked this question was building the model for MSFT earnings. With the large amount of stock they are buying back, I wanted to see how this would affect earnings per share. My basic thought was if they grow earnings 10% and buy back 10% of the outstanding shares (actual will be less than this 5-10%), then EPS grow at 20%. Well this is not true, if you do the math, it is actually over 22%. Maybe 2% is not much to you, but if they keep at this pace, and the amount of buy back grows, this difference becomes larger and larger.

Is the Federal Reserve part of the Government?

In school we all learn that there are three parts of the Government; legislative, judicial, and executive.  So, just check the Fed, and determine if it belongs to one of the parts, if not, it is not Governmental.  It belongs to none, answer found.

Not so fast, the Government is always making things complex, this included.  The Fed was started in 1913 by the federal reserve act, from the legislative and approved by executive.   The Board of Governors are appointed by the president.  Sounds pretty governmental to me.  But, if that is not enough for you, they are in charge of the money supply.  That’s right, they make US dollars!!!!!!!!

Although the Fed is not clearly governmental, I think it is safe to say they are the government.

In looking at my stock quotes during the day, I could not help but to notice a large drop in price, but green being shown for the daily change.  The stock NCTY, traded at 16 on 1/28/2009, but then the following day traded in the low 15s, but showed an increase.  The reason, a $1.1 per share cash dividend.

It is amazing how this is factored in perfectly, so the true gain or lose are shown.  Basically, to ensure arbitrage is not present, a stock should drop by the same amount of its dividend, if not, you could buy right before the dividend, then sale right after, and pocket the dividend.  This also has to do with the term fair value used in pre-market figures.  It takes the previous day’s closing price and makes adjustment to show the actual change.

So, if you ever wonder why the stock price is down, but Google or Yahoo are showing an up, look at the dividend.

I am not sure about others, but the majority of this financial crisis, I have seen on TV, and not in real life.  Is there a slow down?  I don’t doubt, but if you look at the facts there are three reasons why it does not have such a strong affect:

1.  The GDP has just begun to dip and the dip is not so large, so really this year’s consumption is not so different than last year’s.

2.  The cut back that we do have is on discretionary funds.  The point I am trying to make here is that in the past a larger portion of our income went to things we really needed, food, shelter, etc.  Now, we have to buy the 25 KUSD instead of the 35 KUSD…this is much different than having to skip meals due to a lack of food.

3.  Unemployment is still low.  It is true that we are not at full employment, but we are not much over it.  If you need a job, you can get one.  It may be at a grocery store, or flipping burgers, but something is out there.  If you are worried about finding work to feed your family, no need to worry, those jobs are there.  The unemployment now, keeps us from getting our dream jobs, but not from putting food on the table.

Here are a few reasons why I do not think the “crisis” is so bad.  It may get worse, but I think we have a ways to go before people really feel pain.  In my opinion, I do not think this will happen, the economy should turn early in 2009, and we will be back on the upward path.  Lets hope I am right!!!