Novozymes Breakfast Notes--CdeR

Notes from Chris' Novozymes breakfast last week

States See Pickup in Tax Revenue

By CONOR DOUGHERTY

State tax revenue rose in the second quarter, as higher taxes and the slowly improving economy led to an increase in collections.

Overall tax revenue increased 2.2% in 47 states that have reported their receipts for the three months ended June 30, compared with the same period a year ago, according to a report to be released Monday by the Nelson A. Rockefeller Institute of Government at the State University of New York.

This marks the second quarter in a row of recovering tax collections—and follows five quarters of declines in revenue that hammered local-government budgets. The latest figures are still a mixed bag: Some states continue to see declining revenue, but those were offset by states that saw increases.

States continue to face financial pressure, in part because tax collections remain below the levels of two years ago. In addition, aid to state income provided by federal stimulus funds is starting to fall away. Signs that the economy is flagging add to the gloomy outlook for state coffers.

"Most states still show a mismatch between revenue and spending trend lines," said Robert B. Ward, deputy director of the Rockefeller Institute. "It's not time to put away the red ink yet."

Declining expenditures by state and local governments shaved 0.1 percentage point from second-quarter gross domestic product, according to a Commerce Department report on Friday. The nation's 89,000 local governments, everything from states to cities and school boards, have seen persistent layoffs over the last two years.

State and local governments shed 48,000 jobs in July, the biggest number in a year, according to the Labor Department. The sector, which now employs about 19.5 million people, has cut 169,000 jobs this year, including 102,000 in the past three months.

President Barack Obama recently signed legislation that will provide some $26 billion in budget assistance for states. Still, many economists think crimped local-government budgets will continue to drag on growth this year and next. Most state and local governments require a balanced budget, so weak revenue forces spending cuts or tax increases.

"Federal help will buy them more time, but doesn't change the fact that they've got to cut expenses," said Nigel Gault, chief U.S. economist at forecasting firm IHS Global Insight.

The second-quarter gains were driven by growth in sales and income taxes, both of which have been raised in many states. Second-quarter sales-tax revenue increased 5.9% in the 47 states surveyed by the Rockefeller Institute, while the take from personal income taxes grew 1.6%. Collections from corporate income taxes, which tend to be volatile and are just a small slice of most states' collections, fell nearly 19% over the period.

Some 30 states saw tax revenue in the second quarter rise from a year earlier. Many of the strongest performers were places where collections were hard-hit by the recession. Florida saw a nearly 14% increase. Arizona—which, like Florida, has been among the states most affected by falling real-estate prices and lackluster construction activity—saw a 3.9% increase.

Still, revenue declined in several big states. In California, tax revenue declined 0.9%, despite a nearly 12% increase in income-tax collections largely driven by higher taxes, according to the Rockefeller Institute. Illinois saw revenue decline 7%, while Michigan's collections fell 3.8%.

Excellent Piece on Rails in the USA

Economist - Rails

This is worth the time!!!

DJ Credit Suisse Unveils Roster Of Dividend-Paying Stocks To Consider (DJ)

Credit Suisse has come up with a list of relatively stable stocks offering dividends yields that exceed miniscule bond yields. In a research note Friday, Credit Suisse's U.S. equity strategist Douglas Cliggott looked at companies with a market capitalization exceeding $15 billion, firms that offer yields of 2.75% or greater, and a volatility beta that is 0.75 compared with the rest of the Standard & Poor's 500 index.

"We believe the sharp decline in long-dated U.S. Treasury yields is an important event," Cliggott wrote. The trend toward higher prices for government debt continued into Friday, with yields on the 10-year Treasury note and the 30-year bond plumbing multi-month lows at 2.53% and 3.60%, respectively. Bond prices move inversely to their yields. "We believe the demand for U.S. financial assets with relatively high yields and relatively low volatility could remain elevated for several years," Cliggott said.

He found 24 companies that met the three criteria and, on average, offered twice the yield and 60% of the volatility. They also trade at 10% less than the trailing operating earnings of the S&P 500. The bottom line: cellphones and tobacco are the hot commodities in this department; pharmaceuticals and power companies are next on the list.

At the top of Cliggott's list is Verizon Communications Inc. (VZ), which offers yields of 6.5%, according to FactSet Research data. Verizon shares, part of the Dow Jones Industrial Average, have been trading at the top end of the volatility metric, but the shares are trading
generally within a range of $25 to $30. Cliggott, however, looked at returns over the last three months and found that Verizon's are among the highest, though that took a hit with Friday's down market. The cellphone company also has a market cap of $82.7 billion
and a price/earnings ratio of 13.2, according to FactSet.

The next two companies are tobacco giants Reynolds American Inc. (RAI), parent of R.J. Reynolds Tobacco Co., and Altria Group (MO), parent of Philip Morris. Reynolds is paying a dividend of 6.4% while Altria weighs in at 6.2%, according to FactSet. Reynolds' shares have steadily risen from the mid-$40 range a year ago to the mid- to high-$50 level now. With a P/E ratio of 11.3, its market cap is $16.5 billion. Altria's stock ride has been bumpier than that of Reynolds, but shares are up from around $18 a year ago to nearly $23 now. Total company market value is $47.5 billion with a P/E ratio of 12.

Those offering yields in the 5% range are Eli Lilly & Co. (LLY) and utility operators Duke Energy (DUK) and Southern Co. (SO).

The rest of the list is a who's who of Dow 30 and other top names, regardless of whether investors have profited from the stock price in the last 90 days. They include a number of names that have been down of late, such as Johnson & Johnson (JNJ), Kellogg Co (K), Lockheed Martin (LMT) and Colgate-Palmolive Co. (CL)

Also on Cliggott's list: Bristol-Myers Squibb Co. (BMY), American Electric Power Co. (AEP), Dominion Resources Inc. (D), Kimberly-Clark Corp. (KMB), PG&E Corp. (PCG), Kraft Foods Inc. (KFT), NextEra Energy Inc. (NEE), Abbott Laboratories (ABT), Sysco Corp. (SYY), Procter & Gamble Co. (PG), General Mills Inc. (GIS), Coca-Cola Co. (KO), McDonald's Corp. (MCD) and
PepsiCo Inc. (PEP).

The yields range from Verizon's 6.5% to Colgate-Palmolive's 2.8%, averaging more than 4%.

But there certainly are others for the dividend-minded to consider, according to MarketWatch columnist Mark Hulbert. In his newsletter, Hulbert says there also are considerable yields from such names as AT&T Inc. (T), now paying at 6.4%. There is also Exelon Corp. (EXC), with a dividend yield of 5.2%, as well as blue chips Pfizer Inc. (PFE) at 4.5% and E.I. du Pont de Nemours & Co. (DD), at 4.1%, according to FactSet.

ISI: OXY: STRONGER OPERATIONS, GOVERNANCE PLAN AHEAD $100 PX. OBJ (DAB)

* Equity Market Underperformance Transitory?
Occidental underperformed every US Integrated Oil company in recent weeks. Concerns relate to: 1) operational and 2) corporate governance issues. The latter item is vastly more important to investors and will likely extend the share price weakness if left unaddressed.

* E&P Results to Gain Momentum
Production rose by 3% in 1H 2010. However, results would have been stronger absent operational constraints in the US. Momentum is likely in 2H 2010, with output to rise by 6% in 2010 and 2011. We maintain projections for 7% annual gains during 2010-2012, the fastest growth rate in the group.

* Compensation Adjustments Ahead
OXY equity performed well last decade and with variable compensation significant, CEO Irani was rewarded. However, performance adjusted compensation appears 45% too high with significant modifications likely in coming months.

* New Management Succession/Development Plan Needed
OXY's succession and senior management development plan lacks clarity versus all of its other Integrated Oil peers. With CEO Irani and another 6 of 13 board members within 3 yrs. of OXY's stated retirement age; the loss of a senior leader due to lack of visibility in this area would be very negative for the company and its future equity value.

* Resolution on Governance Ahead, Price Target $100
Our top picks in Integrated Oils remain OXY, COP (PT-$65/sh) and CVX (PT-$92/sh.). We arrive at our $100/share price objective for OXY by applying 100% relative P/E and 60% relative dividend yield multiples. We are buyers of OXY at current levels.

JMP: ADBE, Maintain MO, PT $46

Adobe Systems, Inc. (1) (ADBE - $27.95; $14.6B market cap): We maintain our Market Outperform rating and $46 price target on Adobe Systems. On Wednesday, August 18, we are visiting with Adobe’s CEO, Shantanu Narayen, at the company's headquarters in San Jose. Areas we intend to explore include the tone of business, the status of the CS5 product cycle, operating margin expansion potential, and, most important, in our view, the drivers for the next stage of Adobe’s growth including monetizing Flash and expanding in the enterprise. We like Adobe’s leadership position in the creative software space and find current valuation levels attractive. We maintain our above-consensus non-GAAP EPS estimates of $1.93 in FY10 (consensus is $1.86) and $2.24 in FY11 (consensus is $2.15). Adobe is reasonably valued, trading at a 2011 PE of 13x while our price target implies a 2011 PE of 24, in line with the five-year average for Adobe.

Cowen on LIFE acquisition of Torrent

$375MM+ Ion Torrent Acquisition. Consideration is 60% cash 40% stock (offset by new buyback). $350MM in technical milestone payments could be made through 2012.

Based on recent comparable deals, we believe LIFE is likely expecting Ion Torrent to contribute at least $40-70MM in sales over the next 12 months. The deal is expected to be only $0.02/share dilutive in 2010, neutral in 2011. 2010 & 2011 EPS guidance was reiterated.

Barclay's Portfolio Strategy Report

Though we continue to believe that deflation will not happen, in this week's US Equity Strategy note, we discuss what could happen in a deflationary environment.
One thing that caught my eye is that the price-to-book multiple on the Nikkei 225 is 1.2x, while the S&P500 is almost double at 2x.

We believe that elevated economic and regulatory uncertainties will keep the markets volatile, and as such we continue to recommend our more defensive stance instituted in the last couple of weeks. Our favorite sectors are Utilities, Telecom, Healthcare and Staples, while avoiding Materials and Discretionary.

Barclay's Weekly Credit Call

Last week spreads weakened across the board even as overall volatility remained subdued.

In investment grade, yields touched record lows, however spreads remain wide which indicates that yields could move even lower.

Investors should consider new issues in the high yield market as a potential source of relative outperformance.

In the macro front, fiscal policies that complement and support monetary stimulus will be key to avoiding unfavorable broad market outcomes that negatively impact risk asset returns.

As corporate fundamentals remain on stable footing, we maintain our constructive stance on credit in the medium term. However risks linked to poor economic growth have risen of late, and we recommend hedging these risks through selective cyclical shorts or tail risk trades.

Full report via the article titile link.

LIFE: Barclay's Positive on Ion Torrent acquisition

LIFE (1-OW/Pos, $44.11, PT $60, $8.1b) T Butler - Positive on Acquisition - To acquire private sequencing co for $375m in cash & stock plus $350m in milestones through '12; structure provides optionality, new technology provides reduced cost of instruments & size of data output; cut eps '10 $3.46 to $3.43 (inline), '11 $3.82 to $3.79 (v $3.81).