Thursday, January 31, 2013

Earnings Call Notes 1.31.13

Below are quotes from an assortment of recent earnings calls--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of.  Complete transcripts can be found at Seeking Alpha.

Banco Santander (SAN)
capital ratios rising for the sixth year running up to 10.33%. loan-to-deposit ratio is now below 100%

we have assigned since the beginning of the crisis over EUR 23 billion to specific provisions for loan losses and real estate, which account for 10% of our total loan portfolio in Spain.

As for our NPL ratios, the group ratio was 4.54%

And if we look at lending, lending fell overall by 6%, but big differences between segments. real estate purpose fell 32%; the individual household mortgages and consumer loans down 7% due to household deleveraging...reasonably stable lending to companies and to the public sector...balances with large corporates have fallen, too...because of continued deleveraging by corporates.

Brazil, the macroeconomic environment has been quite different to what we expected and what the market expected...Growth on GDP was of about 1%....we think that is going to pick up in 2013 and grow at about 3%. Interest rate at historic growth, 7.25% and inflation almost 6%.

In Spain, the recapitalization of banks and the private sector adjustment already completed

In short, we believe that the worst part of the cycle is already over. Realistic exposure is fully provisioned.

Whether we plan to repay anymore or return anymore [of the LTRO], we are using as cushion basically or insurance...So the decision of whether to repay any more or return any more, well, the answer would be probably, yes. But it will depend on the evolution of the markets and the impact on our income statement, well, it costs 75 basis points...And the liquidity buffer had a negative impact on our income statement
Southern Company (SO)
We continued the ongoing transformation in our generation mix, generating more energy from natural gas than coal for the first time in our history

our kind of color on where we believe the economy is headed is slightly more bullish than we were, say, in the third quarter. We are expecting a backend loaded economic recovery but I feel pretty good about it right now based on what we see.

energy efficiency has almost no influence on the consumption of our customers. 88% or so of usage can be explained by either the income growth of our customers, the price of our product and weather.

We all have these goofy devices. We all have iPads and iPhones and bigger plasma TVs and everything else and when we see the progression that people are moving from small homes to apartments into you now primary housing, we see a growth in square footage per person...All of these things contribute to usage growth

if the final rule is anything like the proposed rule, conventional coal generation is just not doable...I go back to the families we serve, 48% of which make 40,000 or less, those folks make tough kitchen-table economic decisions every day. Their demand for energy is relatively inelastic, and so anything the EPA does which adds cost to energy tends to slow down our economic recovery 
Dow Chemical (DOW)
wet shale gas dynamics are fundamentally changing the game for integrated North American based producers like Dow. This is clearly evidenced by operating rates in the United States and Canada being in the 90s, while Asia and Europe have been in the 70s.

as global demand outstrips supply in the next few years and world GDP gains further traction, we anticipate operating rates higher than 90% leading to substantial margin expansion, a double peak, so to speak.

Dow's feedstock flexibility will allow us to continue to pivot so that we continue to take advantage of our uniquely advantaged feedstock slate and we are building on this advantage.
Time Warner Cable (TWC)
Our programming costs per subscriber has grown 32% in the last 4 years

Our residential video ARPU increased 16% over that same period, so we've effectively raised pricing a little faster than inflation but only half as fast as programming costs have risen.

ARPU per customer relationship, which increased 4% over last year and is approaching $120 per month

We do not pretend that these deals [i.e. the Dodger's deal] are inexpensive or cheap. And our sense is that if we're going to carry these games, they're going to be expensive when we get them. So what we think we've done with these deals is to minimize and stabilize the cost over a long time period.

On Google in Kansas City: The reality is, today, there are not really applications that require 1 gigabit per second. 
Qualcomm (QCOM)
this brings 3G penetration to 29% in China, so excellent progress and still plenty of opportunity ahead

our design pipeline continues to grow. There have been more than 600 Snapdragon-based devices announced and another 170 plus devices announced based on our Qualcomm Reference Design solutions.

we are seeing more efficiency in the 3G, 4G inventory channel as the industry continued to move toward an open retail channel versus a carrier centric channel

We are reaffirming our estimate for calendar 2013 3G, 4G device shipments of between 1 billion and 1.07 billion units, up approximately 8% to 15% year-over-year 
UPS (UPS)
in the U.S, we were off to a surprisingly strong start in January

Holiday retail sales came in slightly below expectations but UPS still hit a new high, delivering over 500 million packages globally during peak season.

On our peak air day, Christmas eve, UPS delivered over 8 million air packages, more than 2.5 times our normal air volume and over 1 million pieces more than last year.

UPS annual revenue of $54.1 billion was our highest ever, as were the 4.1 billion packages we delivered globally.

I think that overall we still see 2013 as a slow growth economy. 

Facebook (FB)
We started off the year with no ads at all on mobile and we ended up with approximately 23% of our ads revenue coming from mobile in the fourth quarter.

Marketers are realizing more and more that Facebook is one of the best places to reach their customers on mobile because of our unique ability to reach specific target audiences at scale.

our total expenses, excluding stock comp, will likely grow by somewhere around 50% in 2013
Paccar (PCAR)
PACCAR's retail share of the U.S. and Canadian Class 8 truck market was 28.9% and DAF's share of the European above 16-tonne market was 16%

Looking at the truck market overall in 2013. The U.S. and Canadian Class 8 industry retail sales are estimated to be in the range of 210,000 to 240,000 units. In Europe, the "greater than 16 tonne" truck market is anticipated to be in the range of 210,000 to 250,000 units.

Natural gas will be a factor, but at this time it's a pretty small factor. We'll just have to see over time how the infrastructure shakes out 
Core Labs (CLB)
Yeah, Jeff, we actually don't think that the shale plays are well understood at this point. Just over the last couple of quarters, we have been able to determine through our fracture diagnostics technology that additional stages, closer spaced, so you have more in greater contact with the reservoir phase is going to proliferate more stages and more closely space stages.

We believe that currently there are only one or two countries that have spare capacity and that amount is fairly limited. If we get some robust economic growth around the world, we are going to see crude prices, Brent prices right back at $150.

Q: perhaps two substantial liquids discoveries yet to be made or announced in North America, can you give us a feel for when we might, the mystery might go way? A: Well, that’s up to our clients, acreage positions are being taken and I got a fairly, once of the acreage positions are established as which happened in the Eagle Ford and then in the Utica announcements will be made. So it’s not up to us, its up to our clients.
Conoco Phillips (COP)
We ended 2012 with just over 8.6 billion BOE of reserves, up 3% overall compared to 2011. Importantly, we added 942 million net BOE of reserves organically resulting in an organic reserve replacement rate of 156%

I think as we look out and think about the future opportunity, I think with this unconventional revolution that we are seeing in North America right now, and some of the technology advances in the deepwater arenas that are becoming pretty perspective. It’s kind of in my view turn from a bid of resource scarcity that was leading to a lot of merger synergies over the last 10 or 12 years and resource capture into a view now...we just think that growing organically, there is the opportunity set to go do that and the option value associated with growing organically is, we thought better in our portfolio then trying to do that through an M&A channel, or some resource access that way.
Viacom (VIA)

the consistent refrain we hear from our audiences is that they want new shows and new episodes in faster cycles, and so we are delivering at all our networks, accelerating development timelines and production to accelerate our ratings turnaround.

original programming that’s new and exclusive to us where we own all the rights and we think that is going to be critical as you move into the future where this program lives across platforms and around the world.

we have content on platforms like Netflix and Google. The growth of streams of our content far outpaces the growth of subscribers that they have
Under Armour (UA)
In our IPO year of 2005, compression represented 64% of our apparel mix. This past year, that compression number was down to just 14%.

we want to go back to this concept around cluster marketing, and the idea there is to create holidays. So holidays are places where based on the entire brand meets at once. What we want to do is consolidate our spend to tighter, but louder messaging
Cullen/Frost Bankers (CFR)
For the year, return on average assets and equity were 1.14% and 10.03%...average total deposits were $17.3 billion, up 13.6%...average loans were up 11.2%

It’s really nice when you’re growing this strong organically. Just to put it in perspective, the biggest bank we ever bought was about a $1 billion. And today, we’re growing at a rate of about $2 billion a year. So this organic is getting better.

You don’t just go make the first call and get the loan...We know that the work we do today is going to payoff about a 120 days from now.

you’ll see a juvenile delinquent come in [to our markets] every now and then, and that juvenile delinquent doesn’t mean a little bank. It means, usually the too-big-to-fail will come flying in with some crazy pricing.
Bank of Hawaii (BOH)
We had a record number of visitors to Hawaii this year and visitor spending reached a record-high of 14.3 billion that's up over 18% for the year. most of that increase coming from our International segment.
Year-to-date return on assets was 1.22% and return on equity was 16.2%. Our year-to-date efficacy ratio was 57.9%, a reduction from 59.2% in 2011. Earnings per share was up 8.3% in 2012. Loans grew 5.7%. Shareholders equity grew 1.9%.
Callaway (ELY)
From a market share basis, through November our US hard goods market share declined to 14.4% versus 15.6% in 2011

what’s occurred between 2007/2008 and the current somewhat compressed gross margins is rising costs out of Asia where we source most of our products, and an increase in the amount of technology in the products such as adjustable drivers and other technologies that in many instances are being sold at the same price points that we’re popular in the market in 2007/2008. So those factors are real in our industry as candidly they are in all industries, and we have to work through those. 
Hershey (HSY)
Halloween results were in line with expectations. The late October storm that affected the East Coast did not have a material impact on our overall Halloween results.

Oil Priced in Yen vs. Dollars

The USD/JPY exchange rate has risen to ¥91 from ¥77 as Japan seems intent on creating inflation for itself by depreciating its currency.  Thanks to that depreciation oil priced in yen  is rising even as it is relatively flat when priced in dollars.  Success?

Brent crude price

Wednesday, January 30, 2013

Earnings Call Notes 1.30.13

Below are quotes from an assortment of recent earnings calls--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of.  Complete transcripts can be found at Seeking Alpha.

Amazon (AMZN)
There is not a lot I can comment on in terms of our plans similar to last year no as we progress through the year, we can give you further updates on what we plan to do there.... 
there's not a lot more I can add to it... 
just stay tuned and we will let you know as the year progresses... 
we will continue to expand our footprint over time ...Beyond that there is not a lot I can add... 
we haven’t given a lot of detail but I think one thing certainly to look at... 
I can't give you specific numbers but we have seen very good progress... 
I can't give you specific for attach rates but the business is making good progress... 
I do not have a specific number for you there, but yes... 
We will continue to add selection on the Instant Video. Beyond that, you have to stay tuned... 
There are not a lot of specifics. We have long been in the practice of not talking about trends in within the quarter in terms of year-over-year growth or anything like that... 
we haven't broken out the first-party versus third-party units since it's something we have done for that's only I am today or we have done in previous calls, so it's not I can help you with there... 
There's not a lot I can specifically talk about as it relates to LivingSocial ...
Boeing (BA)
commercial airplane deliveries was 601 delivered, the most since 1999, and the second-most in commercial aviation history. 
we also led the industry in net new orders, with 1,203, the second highest total in our company’s history 
Our commercial backlog of nearly 4,400 airplanes totals a record $319 billion 
Nearly two-thirds of our order book is with customers outside the U.S. and Europe 
For the quarter, we delivered 23 787s, reaching a total of 46 for the year 
doubling 787 production, increasing the rate from two airplanes per month to five per month 
final assembly build rate to seven per month in mid 2013 and 10 per month by late 2013
The 737 production rate will increase to 38 per month in the second quarter of this year and then move up to 42 per month in the first half of 2014.
Jones Lang LaSalle (JLL)
while capital values continue to increase in most major markets around the world compared to the prior year, the rate of growth has slowed in a number of key markets. 
The vacancy rates across 98 global markets remain stable in the fourth quarter at 13.2% as vacancy declines in the U.S. and Europe were offset by increases in Asia Pacific. Prime rental growth slowed in the quarter, increasing 2.1% year-on-year, while Beijing, Sao Paulo, Mexico City and San Francisco recorded the strongest rental growth in 2012 while demand falls, so prime rent decreased furthest in Hong Kong, Singapore, Paris, Madrid and Brussels. 
institutional investors are maintaining and, in many cases, increasing their allocations to real estate, attracted by returns that compare favorably to other investment options.
Robert Half (RHI)
Small and midsize companies are hiring. 
There is ongoing demand for flexible staffing. The percentage of temporary jobs created in the U.S. in this cycle is double that of the prior one, 13.2% versus 6.5%. The pace of temporary staffing growth in the current recovery also has been faster. 792,000 temporary jobs were created in the 39 months ended December 2012. In the prior recovery, it took 56 months to add 513,000 temporary jobs. 
As of the end of 2012, the temp penetration rate in the United States was 1.9%, of total U.S. non-farm employment, which is close to the high point in the last cycle. This percentage is approaching the record high of just over 2% in 2000. There is opportunity, we believe, for the temp penetration rate to expand further based on the secular demand for staffing flexibility we have been discussing. 
Affordable care act: we can legally help [our clients] remain under 50 [employees] since we're the employer of record for the temporaries we provide to them 
It's estimated that there are 130,000 firms with 50 or fewer employees, that over half of them do not provide coverage to their employees. 
the data would show that our European operations are bottoming
W.R. Berkeley (WRB)
there would appear to be an increasing awareness of the impact that diminishing investment income is having on the industry’s economic model. While this macro situation is widely discussed, the sense of urgency in tackling these issues seems to vary from carrier to carrier. Having said this, there is an ever-growing percentage of the market that is pursuing rate in an effort to remedy the situation.

On Sandy: the industry received a wake-up call with regards to the imperfections of both cat modeling, as well as local building codes as we endure the impact that a large tropical storm can have on a region.

Workers’ compensation remains one of the lines of business where the market is most aggressive in seeking rate.

The excess casualty market is also showing early signs of a return to underwriting discipline

combined of a 98.1%. However, when one adjusts for storms as well as reserve development, we believe the company is running at about a 96.5%

With every passing quarter, it is becoming more apparent we are entering a hard market. The number of carriers seeking broad rate increases continues to grow, and the minority of companies that continue to act irresponsibly is a dwindling population. While it is true we have not yet reached the point where there is low-hanging fruit, it has been many years since we as an organization have been so encouraged by the market.

The benefits of start-ups are twofold. One, as opposed to buying something, you don’t get someone else’s problems. And two, you don’t get intangible assets on your balance sheet, you get to tax deduct the expenses of building the business, and you don’t have carry forward issues as you go forward.
Ford (F)
In the fourth quarter, total company production was about 1.5 million units, 125,000 units higher than a year ago. This is 13,000 units higher than our guidance. We expect total company first quarter production to be about 1.6 million units, up 160,000 units from a year ago reflecting higher volume in all regions except Europe. Compared with fourth quarter, first quarter production is up 72,000 units.

This was our first U.S public debt issuance in about a decade and took advantage of favorable market conditions to issue low cost, long term debt.

Europe inventory destocking: It’s principally behind us. We still have a little bit of an imbalance...But the majority, the vast majority of the destocking is behind us.
Manpower (MAN)
Revenue in Southern Europe was slightly weaker than expected...Revenue in Italy was down 8%...Spanish market continues to remain soft in the quarter...higher vacation and lower bench utilization in Germany and Sweden, which also negatively impacted the gross margins...We continue to see soft demand within the Swedish market...Japan experienced modest growth...Australia continues to languish...Our business in China and India continue to grow nicely and contribute to the bottom line 
Secular trends in the area of Manpower, Experis, Right, Manpower Group Solutions, and emerging markets are all there. In many cases, the voice of these positive secular trends have been ground out by the cyclical nature of what is occurring, particularly in Europe, but it cannot be underestimated. 
The conversations we’re having with our clients and prospects for the need for agility is translating to much more of an outcome based solutions environment as well as the use of temporary staff to create the agility that is required
Potlatch (PCH)
Our Wood Products division continues to perform exceptionally well bolstered by a significantly higher demand and pricing as the housing market recovers. Furthermore, the division finished the year with its best annual performance in the nearly a decade.

Like we are currently running our facilities at about 104% of capacity due to the amount of over time that we operate the facilities and that’s on a two shift basis.
ACE (ACE)
The x cat [excluding catastrophe] accident year combined ratio was 91.4% 
Book value per share grew about 2%, and our operating ROE for the quarter was 8% 
Our commercial P&C business in the U.S. continued to benefit in the quarter from an improving price environment where we are now achieving rate-on-rate increases for the second quarter in a row, and I firmly expect this to continue. 
From what I see today, I am more bullish about the pricing environment in the U.S. than I have been for some time.
AK Steel (AKS)
Steelmaking input costs, namely coal, coke and iron ore, have fallen, and that will result in significant cost savings for us in 2013. Second, we expect to benefit from increased shipments to both the contract and spot markets in 2013 due to slightly improved overall demand and a greater share of the automotive market.
Nucor (NUE)
New CEO John Ferriola: As we announced on November 16, I became Nucor's CEO at the start of this year. 
current capacity utilization of just 75% for the U.S. steel industry.

Nucor will continue to be proactive in bringing attention to the critical need for our government to enforce rules-based free trade.
Waddell and Reed (WDR)
Average productivity per advisor continue to increase reaching $44.3 thousand during the quarter, a record’s high. 
We’ve seen a significant increase in the appetite for our equity products and we have not seen a concurrent diminution of the appetite for the fixed income products that had been working, which is to say, the sales are broad based and in that sense encouraging.
J&J Snack Foods (JJSF)
Churros sales were up 33%...Soft pretzels sales however were up 5%...ICEE and frozen beverages, frozen beverage and related product sales were up 4%

Number of Days Since Last 3% Down Day

2012 was a pretty mild year as far as volatility is concerned.  There were two periods of correction, but both were relatively light and there wasn't a single day that the S&P 500 was down 3% or more.

Markets have calmed down to the extent that it's actually been 448 days since the last time that the S&P 500 has fallen by 3% or more in a single day.  At today's level on the Dow that would be a 400 point decline.  For comparison, since 2008 we had grown accustomed to getting a decline that large once every 32 days on average.

Looking at S&P history since 1957, the current 448 day streak is better than average, but not quite at the best levels that the index has ever seen.  Over that period, a 3%+ daily decline happens about once every 217 days.  However there are several long periods without them. There was no such decline for 11 years between 1962-1973.  Even recently there wasn't a 3% decline for nearly 1500 days between 2003-2007. That streak was broken on February 27, 2007.


Does Negative GDP Growth Portend Recession?

While it was generally expected that 4Q was a slow quarter for economic growth, it was probably a surprise to many that the growth rate was negative.  What are the odds that this negative growth portends a recession?

Assuming that the revised number remains negative this is the 42nd time in 279 quarters since 1947 that quarterly GDP growth has been negative.  Of those 42 times, 27 of them came during a recession (as defined by NBER).  Therefore GDP has contracted 15 times while the economy was not in recession.  Below is a list of those times.  The economy entered into a recession in the following quarter five out of those fifteen times.

Of course, NBER defines recession dates after the fact, so we could be in a recession right now and just not know it.  Given that the market is hardly lower today, that would probably be a surprising result.

Note: Figures are NON-Annualized

Tuesday, January 29, 2013

QE Effect on S&P 500

After QE3's announcement in mid September there was some concern that the effect of QE on the market had eroded because the S&P 500 proceeded to sell off by 5%.  It could be true that QE is losing its efficacy, but it's worth noting that true balance sheet expansion didn't really start until mid November because of the mechanics of MBS purchases.  It therefore may or may not be coincidental that MBS started to show up on the Fed's balance sheet around the same time that the S&P 500 found a bottom.

Below is a chart of how the S&P 500 has done during periods of QE, but instead of using the announcement dates, the chart highlights the times that the Fed's holdings of Treasuries and MBS were increasing (note that this analysis therefore excludes operation twist).  Since the S&P 500 is now hitting new cycle highs, perhaps one could argue that QE hasn't exactly lost its potency.



Earnings Call Notes 1.29.13

Below are quotes from calls that I've read today--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of.  Complete transcripts can be found at Seeking Alpha.

Caterpillar (CAT)
"After a great first half the economies around the world began to slow around mid-year, and as a result dealer sales to end users began to flatten out. We found ourselves with inventory that was too high and dealers also found themselves with too much inventory. As a result dealers slowed orders, and in the third quarter we began the process of scaling back production. Now while production declined somewhat in the third quarter, we took it down much more in the fourth quarter, and because of that we were able to reduce inventory in the fourth quarter. "
"We've already seen pretty substantial pickup in construction orders in the fourth quarter. "
"On mining again, we had massive orders, I mean very large orders in mining throughout much of a ’11 and really through almost the entire first half of ’12. That’s when sentiment changed I think in the world economy it was evident, in China it was softer, you had an easing of commodity demand, although, overall mining activity actually did go up in ’12. So, orders on hand were quite significant and over the past six months customers have really eased off on ordering."
Plum Creek Timber (PCL)
"Lumber and wood panel prices have increased significantly, encouraging lumber mills to increase their output. "
"Mill operators are reinvesting in their mills and some are adding shifts."
"contractor availability is expected to be a meaningful supply constraint to the industry" 
"Southern sawmill owners are running extra hours to increase production to meet demand, and many are at the point where they are contemplating adding employees and an additional shift to meet the expected demand growth this year."
"assumptions that we'll see, 950,000 to 1 million housing starts next year, and we believe for that demand to be met, you're going to have to see an increase in production U.S. South, and the Southern production right now is about 14 billion board feet, and we expect that you'll see an increase in production in North America of about 3 billion board feet, and about half of it should come from the U.S. South."
Harley Davidson (HOG)
"The biggest thing, I think, surprise in 2012 was just how low the retail credit losses were. At 79 basis points, clearly, the lowest we've seen in over a decade and considerably better than what we had seen in 2011."

"we think as far as the consumer is concerned, that they're starting to shift their behavior a little bit. We may see a little bit higher credit losses. "
"we said, I think, 3 years ago, that we were going to open between 100 and 150 new dealers around the world. As you mentioned, we're certainly on plan to do that. We believe that there is still opportunity really in every market."
Yahoo (YHOO)
"talent is fundamental to our success. Attracting the best people to Yahoo! is critical, and we embarked on a number of initiatives to make Yahoo! the absolute best place to work."

"Yahoo! is focused on making the world's daily habits inspiring and entertaining. And while we're starting with unique strengths, exceeding the growth that we aspire to will take multiple years. Essentially, we need to start a chain reaction. First, we need to achieve product excellence and differentiation by launching new revamped and innovative products. With great products, comes user growth and more engaged audiences. And finally, that user adoption drives advertiser attention, spend and, therefore, revenue."
"Focusing more on the pure advertising and monetization standpoint, there's greater opportunity with the big 4: Search, Display, Mobile and Video"
CIT (CIT)
"Deposits are now almost $10 billion, representing over 30% of our total funding."

"I think the competitive dynamics are increasing, as we've kind of talked about. There's the continued focus on loan growth in our competitors as well as ourselves, but we are being very, very disciplined and so we're going to keep that discipline."

On credit spreads: "So cash flow still is probably in the 500 (bps) range, plus or minus, depending on the transactions. Our ABL is probably more in the north of the 300. And then some of the ABL market, more of the retail flow stuff is probably in the 200 range. So at least for our core markets, we feel the risk return is still attractive"

"we have 10 (Boeing 787's) on order. Our first delivery is we have 2 being delivered -- or scheduled to be delivered in 2015. So I think -- from our perspective, I think it's a little premature to kind of sort (concessions from Boeing) out. But the viewpoint is that it's modest in our overall order book and we hope that these issues kind of get resolved because it's something -- the aircraft itself is something that is big in the industry."
Danaher (DHR)
"I was in China 2 weeks ago, and we spent a fair bit of time on this subject. I think it's interesting if you just look at our own trends through the course of last year, we really saw quite the bifurcation between our industrial businesses and our healthcare businesses, both LS&D and Dental. We were basically up 20% for the full year, and we saw that strength throughout the year on the healthcare side of the portfolio. We were down nearly double digit the first half on the industrial side...I think when we look at what's happened in Life Sciences & Diagnostics, we are clearly the beneficiary of a multi-year buildout with respect to the healthcare delivery, particularly in the West but also increased utilization."
 Seagate Technology (STX)
"For the December quarter, we shipped over 47 exabytes of storage with an average of approximately 823 gigabytes per drive. This reflects a 59% year-over-year exabyte growth, which is well over twice the current rate of areal density growth."
"Data consumption and creation, along with the increase of global internet connectivity continue to drive petabyte growth at rates that are significantly greater than the areal density growth rate."
Illumina (ILMN)
"the Illumina Genome Network received orders for approximately 13,000 genomes. Today, interest in sequencing services remains high, including preliminary talks of large hospitals and governments that hope to sequence significant numbers of individuals."
"we've added significant new capacity to our San Diego facility and will open a new lab later this quarter in our Hayward location. This facility, along with improvements to our existing infrastructure, will provide the capacity to sequence approximately 30,000 genomes this year."
EMC (EMC)
"We are squarely focused on several of the hottest areas in IT: cloud computing, big data and trust."
"the companies and entities out there understand that cloud and big data are going to change the landscape and if one doesn’t invest in these technologies, their companies will be left hopelessly behind."

How Long Does the Average Bull Market Rally Last?

As of today, the bull market which began in March of 2009 is 1,422 calendar days old.  Over that whole period there have been nine drawdowns of greater than 5% which segment the bull market into ten periods of bull market rally.

The average bull market rally since 2009 has lasted 99 calendar days and has seen the market rise by 18.8%.  By contrast our current rally, which started in mid November, is just 75 days old and has charted a 10.9% rise.  If this rally were to last in line with the averages it would go on until February 22 and the S&P 500 would rise to 1608 before the next 5% pullback.  Below is a chart of the full bull market broken down by periods of rally and >5% drawdown.

Bull Market Rally

Monday, January 28, 2013

Longest Interval Between Dow All Time Highs

Even though the Dow was down by 12 points today, it's beginning to look increasingly likely that we'll see a new all time high for the index in the not too distant future.  The previous all time high was at 14,164, just 281 points away from where the index closed today.  The index hit that mark in October 2007--a little over 5 years ago.  That's the 5th longest span in history that the Dow Jones Industrial Average has gone without making a new high.  After the depression it took 25 years to get back to its highest levels.


SPY vs. TLT

2013 is beginning the year with a strong dichotomy in asset class returns.  While the S&P 500 is on pace to have its best January since 1997, the 10 year yield has moved higher by 20 bps.  Expressed in more intuitive terms, SPY is up 5.3% year to date, while TLT is down 3%.  The divergence between the two could represent some psychological pain for any investors substantially invested in bonds.


Friday, January 25, 2013

Offbeat Analysis: Optimum Class Size and Investing

An observation on the limits of cognitive capacity: the number of investments that any individual can properly monitor is not dissimilar to the number of children that an individual teacher can keep track of in a classroom.

It's logically accepted (albeit with some challenges to the conventional wisdom) that smaller class sizes are better for students because teachers can devote more time to each student.  Similarly a smaller investment portfolio means that the investor can devote more time to monitoring each investment.  There are tradeoffs though.  Smaller classrooms mean a higher cost of education per student and smaller portfolios come at the expense of diversification.

Unfortunately there's no scientific way to determine the optimal level that balances these competing forces in classrooms or investments (sorry efficient markets theorists).  However, qualitatively, the best size would be the largest size possible without sacrificing the individual attention needed to monitor the progress of each student/investment.

Looking at international data, the prevailing balance in the classroom seems to be in the 20 student range.  In the average teacher's portfolio, each student is a 5% position.

Classroom Size by Country
Source: OECD

Earnings Call Notes 1.25.13

Like most analysts during earnings season I spend a lot of my day reading earnings calls.  I've been trying to figure out a good way to incorporate some of the data that I gather from those calls into the blog.  To that end below are quotes from calls that I've read today--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of.  Complete transcripts can be found at Seeking Alpha.

Raytheon (RTN)
"Looking at the defense environment, the U.S. government averted the brunt of the fiscal cliff earlier this month. However, the ultimate outcome for sequestration was delayed and not resolved, and the new potential implementation date for sequestration is now March 1. The government continues to operate under a continuing resolution for fiscal year '13 that runs through March 27 or roughly halfway through its fiscal year." 
"I would say that the department, State Department and the administration, understands that foreign military sales help us bridge the gap as we go through these headwinds in the sense that, if we have these programs in our factories, they help keep our overheads in control. They help, in some cases, to lower them, which allows the U.S. to make the decisions that need to be made."
On acquisitions: "Right now, I can tell you I've not seen a reduction in market prices. Everybody still thinks they're beachfront properties. And so for us, we're pretty disciplined here about how we go and do that. But as you look to the future here, people are going to have to evaluate what they have and maybe the prices will get better."
Halliburton (HAL)
"North America, 2012 was a very challenging year for the industry. Operations we’re impacted by headwinds such as guar costs, pricing pressures and a significant drop in the natural gas rig activity. However I want to be clear before you listen to the rest of the presentation. We believe that the fourth quarter marked the bottom for U.S. land margins
we believe the rig count will continue to grow from current levels, but will average down slightly for the year compared to 2012."

"Many of our competitors are operating at breakeven or lost positions which should set a floor on stimulation pricing. However, an improvement in pricing will require a meaningful decrease in excess capacity"

"We are expecting the industry to add hardly any capacity this year and over time, we should see a drop in excess horsepower due to normal attrition. Increasing oil activity and rising service intensity will also help to a certain extent. However, we believe that without a significant uptick in natural gas drilling, it is difficult to see a path for pressure pumping equipment to reach equilibrium this year." 
"Our view is that the U.S. natural gas drilling will not be a major activity driver in 2013, although the rig count in that area appears to have flattened. The decline in output from existing natural gas wells will likely be offset by additional volumes generated from new gas wells, the restart of shutting wells and associated gas from new oil wells if we see any meaningful uptick in gas activity that likely will not occur until the second half of the year. That being said, we still strongly believe in the long-term fundamentals of the gas business and are not going to abandon that market." 
"Our growth strategy going forward remains the same. We'll continue to grow our market share in deepwater, in global unconventionals and in mature assets."

City National Bank (CYN)
"City National’s assets exceed $28 billion, a 21% increase as well from the prior year." 
"Between September 30 and year end, we added a record $1.1 billion to City National’s loan portfolio."

"In the fourth quarter, loans really grew across the board." 
"commercial line utilization increase for the second straight quarter topping 60% for the first time since the end of 2010." 
"Particularly noteworthy improvement can again be seen in California’s housing market. The median home price in Southern California, for example, is up 20% year-over-year and home inventories are shrinking."

"I know how focused, almost all of you are on margin pressure and its impact on the industry in general. And there is no doubt that growing loans and deposits is putting more pressure on margin. But it does add to net interest income now, additionally when rates rise, these loans and deposits will provide large margin expansion for companies like ours." 
"The flattening yield curve that took place during 2012 will no doubt make it harder for banks to grow earnings in 2013." 
"I think one of the points that’s worth noting is that the average duration in our [securities] portfolio is relatively conservative. And we have deliberately tried to be conservative with it, just find the balance between getting a decent yield but not locking the company in to rates for the long-term that we would regret a few years out."  
East West Bank (EWBC)
"Year-to-date, return on common equity and return on assets were both above our peers at 12.3% and 1.3%, respectively." 
"During the full year of 2012, East West grew non-covered commercial and trade finance loans by $1.1 billion or 35% to a record $4.2 billion" 
"Provision for loan losses on non-covered loans was down 35%, net charge-offs on non-covered loans was down 62% from a year ago."

"Single-family loan originations...an average loan size of $389,000 and an average loan-to-value of 53%." 
"many banks out there are offering 10-year fixed (interest rate swap) at a very low rate and I think that someday down the road, maybe 3 years, 4 years from now, I think they're going to be hurting in a big way." 
"mostly in California and New York that we see activities in term of the commercial real estate."
"At this time, we would like to grow our loan portfolio across-the-board."

"in 2010 and 2011...we mainly focused on C&I...But in addition to that now, we are kicking up our real estate origination for CRE and multifamily and so forth and even construction loans." 
Cash America (CSH)
"In retrospect I think both our customers and our company have enjoyed the easy benefits of escalating gold prices for the past two years and now we need to recalibrate our training and marketing programs and store operating model to one that is more attuned to the emerging general merchandize product categories in disposition channels."
"you have a whole new emerging electronics categories with smartphones and tablets and a wide variety of other things we’re seeing in our stores today and we need to be training our folks to encourage our customers to bring in those items to the extent that they have those versus jewelry or scrap gold."
"I have got to believe that at this point that people are going to have to start using additional collateral to some extent that they offered up most of that excess gold and jewelry over the last few years"
Kennametal (KMT)
"Political and economic uncertainties led to spending deferrals and inventory destocking by customers. Those conditions resulted in a weaker-than-expected global investor production across certain end markets and geographies." 
"In addition, our sales were unfavorably impacted as a number of customers who extended shutdowns year end holidays. This trend was more severe in Europe but it occurred in North America as well." 
"We now expect fiscal '13 sales to be between negative 2% and negative 4% with organic sales ranging from negative 7% to negative 9%." 
"we have seen an uptick in Asia. However, it's still, year-over-year, a negative growth"
Jacobs Engineering (JEC)
"Oil and gas market remains very, very strong. It's one of our hottest markets." 
"And in the chemicals market, it's as good as it's ever been in my memory. It's a very strong market for us right now. It's obviously a business where there's a key driver is this cheap gas" 
Question from an analyst: "one of your peers, couple of weeks ago, came out and said that labor constraints were looking like it was becoming a slight bit of an issue sort of in the Gulf Coast area on the petrochem side. So I was just wondering if you can -- it's the first time I've sort of heard that in a while. "  
Response: "we will continue to see pressure on escalation and rates, but it's all good news. The craft side of the business is probably another 8 months to a year away before we start seeing pressure there, but on the engineering side, we're in the throes of it right now." 
"my concern about the fiscal cliff discussion for a while was that it might push all these projects significantly out. And it doesn't seem to have done that. So our customers seem to be planning their investments, particularly ones in the natural gas or in the chemical side,"
Comment from analyst: "So it sounds like some of your labor costs are starting to move up in the market, starting to tighten"
Microsoft (MSFT)
"Windows 8 is a sort of big, bold, re-imagining of Windows across the whole ecosystem, and I think this was the start of that process. I think, we all collectively learned a lot about from the user interface to the touch devices. And, as I tried to give context on the call, there's a lot of things we are working on with our partners that I think to continue to drive this process forward over the next several quarters whether it's the chipset, whether it's with developers or the kinds of applications that people want and certainly for the kinds of touch devices that they write price points that consumers want I think all of that continuously improving, we are continuously learning and happens over time, but this is a big ambitious re-imagining of Windows, and this quarter was the first step in that process." 
Starbucks (SBUX)
"a Starbucks card was perhaps the nation’s single most frequently given holiday gift, with one in 10 U.S. adults receiving a Starbucks card" 
"The U.S. remains a market rife with growth opportunity for Starbucks, and we will profitability capitalize on this opportunity by adding 1,500 new stores in the U.S." 
"Starbucks’ China and Asia-Pacific segment now spans 12 countries that by the end of fiscal 2013 will grow to nearly 4,000 stores, including 1,000 stores in Japan and 500 in Korea." 
"We had 86% more customers sign up for a My Starbucks Rewards card in the first quarter of 2013 than in the first quarter of 2012. And it’s not that these new card customers didn’t know where to find us last year. It’s that we are more deeply connected, and even more relevant, to them than any other time in our history." 
Procter and Gamble (PG)
"[plan] further reduction of non-manufacturing [headcount] by additional 2% to 4% per year from fiscal year 2014 through 2016." 
"there are new categories we have entered too. Jon mentioned the ZzzQuil in sleep aids. We entered the auto care fragrance category. And as we also talked, we have bolstered our new category innovation as well and we fully expect some of those innovations to come to market over the next year or so." 
"we are growing or holding share in the 60% of our business in the U.S"

AT&T (T)
"we believe we are going change every aspect of our customers lives. How they buy things. How they manage and secure their homes. How they access entertainment. Their experience behind the car wheel is going to change. There is going to be a whole healthcare ecosystem change. And I can go on, but it’s clear that the industry is moving beyond the device and into a new era of solutions and services. "
"the question you have to ask is are there opportunities for us to participate in that growth outside the U.S."
Keycorp (KEY)
"Our average C&I loans were up 21% over last year and led our year-over-year loan growth." 
"we will maintain a moderate risk profile" 
"Our capital remains a competitive advantage for us in both the intermediate and long term."
ITT Education (ESI)
"prospective students are more sensitive of the cost of postsecondary education and are making educational decisions based on their perceived opportunity to derive value from their educational investment."
AmerisourceBergen (ABC)
"demographic trends and health care reform initiatives will expand coverage to the uninsured and should drive organic growth in our industry over the next several years"
Southwest Airlines (LUV)
"We are seeing encouraging signs in our business travel trends."
United Continental Holdings (UAL)
"We did not achieve our return on invested capital target in 2012 and we’re absolutely not satisfied with the financial results we produced last year."
"look the [787] is a terrific aircraft and customer loves the airplane and I have no doubt the customers will flock back to that airplane as soon as we get it back up again."
Avnet (AVT)
"After several quarters of a somewhat cautious technology spending environment, certain segments of our served markets demonstrated relatively better strength in the December quarter."
Flextronics (FLEX)
"the macroeconomic environment remains very soft for electronics hardware. The semiconductor industry association, or SIA, forecast for the start of 2012 was for 7.6% growth. The semiconductor industry ended the year with a negative growth rate of about 3.2%. These numbers would have been lower if not had been for the strong growth and volume from both Samsung and Apple." 
"we also announced an important multibillion partnership with Google-Motorola Mobility to streamline their supply chain operations and position Flextronics as a key supply chain partner for current and future hardware products within its ecosystem"
Synaptics (SYNA)
"The latest projection from IHS Research in November shows the smartphone market hitting 660 million units in 2012." 
"IDT’s projections for notebooks with touch is now 25% of the unit shipments by 2014."
Silicon Valley Bank (SIVB)
"For the full year 2012, we grew average loans by $1.7 billion or 30%"
"Yeah, we see more people entering the market [for loans to venture stage companies]. And I guess it's not surprising, mainly because it's one market. And we've said this for years, and we should expect to see this, that it's a high-growth market, it's performed well through multiple cycles, and again, it's one of the only fast-growth areas in the market. So that's not surprising...So, yes, we have acknowledged that City National has been hiring in the marketplace and they will compete with us."
Xerox (XRX)
"Xerox is a company that is going through a seismic transformation." 
"The shorter contract and less megadeals is a sign of the times today. We had significant pressure in both government and large enterprises, given a very weak macroeconomic environment."
LG Display (LPL)
"We expect the continued risk demand trend in 2013. However, the industry supply increase would be also marginal this year." 
"several companies will execute fab conversions in second half, which would have a positive impact on the supply side."

Thursday, January 24, 2013

Earnings Call Notes 1.24.13

Like most analysts during earnings season I spend a lot of my day reading earnings calls.  I've been trying to figure out a good way to incorporate some of the data that I gather from those calls into the blog.  To that end below are quotes from calls that I've read today--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of.  All the transcripts are found at Seeking Alpha.

Raymond James--RJF (Regional Broker)
"assets under management, have gravitated more towards fixed-income and our retail clients have gravitated more to fixed income as in asset allocation. So with all those factors at play, we're not as sensitive to the U.S. equity markets as we have been in the past."  
"I think that our investors' sentiment and our sentiment -- investor sentiment survey is up. We haven't seen a massive move to equities. I know a lot of the funds are showing big inflows. I think we've been more with our investors, we try to keep them engaged, maybe they've been a little more engaged in other places. So I haven't seen a big movement yet. But having said that, the commission levels in January have been pretty good so far. I'm a little bit behind in terms probably up to today. But I mean, I can't say we've seen a huge flood into equity since the beginning of the year. "
McCormic--MKC (Spices)
"Globally, digital marketing was 12% of our total spending, up from 5% in 2010." 
"Our brand marketing plans include further increases in digital marketing, support for new product launches and a sharp focus on retail price points. " 
"Sandy. While this devastating storm had a limited impact on our sales to customers in the Northeast, it did impact a number of suppliers in this area, which created product shortages during our critical holiday selling period. We also lost several ships of production time in our manufacturing distribution facilities in Maryland." 
"we've had about a 45% increase in commodity cost over the last 4 years and have taken about 25% pricing and we've taken a number of different actions along the way, and we are always evaluating the impact of that on volume….and by the way, what we have seen as our pricing has gone up, we have seen those price gaps close now as competition, largely private label, has also taken place increases to either catch up or improve their margins." 
"About quick service restaurants: I'm following our customers' releases as closely as -- probably closer than you are because they really impact us. But I would say that we think that it's going to be fairly challenged."  
"[around the holidays] typically we do see an increase in branded shares for a couple of reasons. One is consumers are less willing to take chances on their meals." 
Logitech--LOGI (Consumer Electronics/Peripherals) 
"As we discussed in our Q2 earnings call the main factor in our weak performance was a significant weakness in the global market for new PCs. This weakness which had a negative impact on sales in all our PC related categories reflects the combination of the slow transition to Windows 8 and the growing popularity of tablets and smartphones as mobile computing devices."
Hill Rom--HRC (Healthcare, Hospital Beds)
"Our rental business in North America remains challenging due to continued efforts by hospitals to reduce their operating and supply chain costs. We expect this to continue given the economic pressures they are dealing with. "
Nokia--NOK (Cell Phones)
"we shipped 6.6 million Smart Devices units of which 4.4 million were Lumia devices." 
"Now more than ever, operators are pushing for a third ecosystem to emerge, and they are committing to more marketing, more training, and more in-store displays to help Windows Phone and Lumia to grow." 
Grainger--GWW (General Business Supplies Distribution)
"Light Manufacturing was up in the high-single digits; Heavy Manufacturing and Commercial were up in the mid-single digits; Government and Retail were up in the low-single digits; Reseller was flat; Contractor was down in the low-single digits; and Natural Resources was down in the mid-single digits." 
Symantec--SYMC (Cyber security. Lots of interesting discussion. Worth doing a full read through)
"welcome to the unveiling of Symantec 4.0"  
"despite the fact that we have such great point solutions built mostly from acquisition…We haven't really integrated the value of these different point solutions" 
"the porous nature by which information is flowing across enterprise, individuals, governments and your personal world. Those boundaries are now taken down." 
"There was one large pharmaceutical company, and as the CIO was describing his real estate he said, look, we have 60,000 PCs. We have about 7,000 Macs. We have 15,000 iPads and over 10,000 Android smartphones in their environment that he was aware of. And he said what he needs is an offering that allows him to let people use those devices but, at the same time, protect the business. " 
"while we had the great assets, we didn't have a strategy or an operational plan to focus on delivering value for customers, and that's what Symantec 4.0 is all about." 
Western Digital--WDC (Hard Drives)
"there are early indications of consumers' stronger intentions to purchase new PCs this year."  
"The HDD market shipped approximately 136 million units during the December quarter, slightly less than the 140 million units we anticipated in our guidance." 
Apple--AAPL (Fruit company?)
"Apple is in one of the most prolific periods of innovation of new products in its history." 
"We have now sold well over 0.5 billion iOS devices" 
"The pipeline is chock-full, I don’t want to comment about a specific product, but we feel great about what we have got in store."
Netflix--NFLX (Pay TV Channel which happens to be distributed via internet)
"Both the rise of tablet phones and the rise of smart TVs are very helpful to us, and they are really the beginning of a trend along Internet connected ecosystem devices. And certainly the more convenient those devices get, the more people will feel comfortable watching and enjoying content on a wide range of devices, some day including Google Glasses, Internet Watches all kinds of scenarios over the next five years and as well as multi-screen scenarios, where you use your tablet or phone to chose content on the TV. "
US Airways--LCC (Airline)
"several years ago, we started talking about all the things the industry needed starting with consolidation. Included on that list was management teams that care more about returns than market share. Included on that list was a better management that work better with labor. And I think all those things, we've made huge progress on. Also on that list, though, was a better understanding by the government of the importance of aviation and a national policy from a national aviation policy from the government, and that hasn't happened. And that's next on the list, and that's where the rest of the value, I think, is going to come from, Jamie, and where it needs to come from. We've got -- everything I've talked about so far is self-help, and the industry had to do a lot of this to get itself right, and I think we've made huge progress in that regard. But we're fighting our own government on a lot of issues, and taxation is high on the list, but there are other issues. Other international carriers don't fight the same battles we do, and we're -- well, the playing field's not particularly leveled."

Putting Apple's Decline in Perspective

Apple's 10% decline today represents a $45B loss of market value, which is a larger amount than the market cap of 85% of the companies that make up the S&P 500.  $45B is roughly equivalent to the market value of COST, NKE or MDT.

Since its peak at $659B in September AAPL has lost $230B worth of value.  That's more than the market cap of all but seven US companies, nearly equal to the entire value of MSFT, CVX and GE!

In fact, AAPL's loss in market value has been so large so fast that it is entering the realm of macroeconomic proportions.  Since September, AAPL's market cap decline has been almost equal to the amount of money that the Fed has injected into the economy via QE3, which sits at ~$250B.

Comparing Apple's decline to QE3
QE3 measured as increase in MBS/Treasuries at Fed plus commitments to buy MBS

Wednesday, January 23, 2013

Credit Spreads are not Confirming the VIX

The VIX currently has a 12 handle and appears to be getting ready to break back down to levels not seen since before the financial crisis.  Prior to 2007 the VIX was quoted in a more narrow range at a lower level than its recent range.  In 2007 there was a structural break and the VIX rose as risk appetite collapsed.  Now for the first time since 2005-2006, the VIX is approaching old levels.  To many this could signal that risk appetite has returned to pre-crisis levels.

Investment grade credit spreads display a similar structural break to the VIX beginning in mid 2007, but the VIX's recent decline to previous lows has not been matched by a tightening of credit spreads.  While that might suggest that the VIX isn't telling the full story on risk appetite, it's tough to say which indicator gives a clearer picture because all in yields are much lower than they were in 2006 even if spreads have not completely compressed.

Data via FRED

S&P 500 Unchanged Since 2000?

The S&P 500 is just 10 points away from reclaiming the 1500 mark, a level it first hit nearly 13 years ago in March of 2000.  The overall index may be flat since then, but that's not to say that there hasn't been plenty of change beneath the surface.

Nearly half of the companies in the index have changed since 2000--only 269 of the same companies remain.  The market cap of four of those companies have appreciated by more than 1000%, while the same number have lost more than 80% of their value.

The vast majority of market caps have moved significantly more or less than the index.  In fact, there are only eight companies that are +/-3% from where they were in 2000 and 22 are +/-10%.  Below is a list of companies that have remained in the S&P 500 since 2000 with the smallest change in market cap.


NOTE: original post compared share prices, but the database I was pulling from had some trouble dealing with splits so there were some problems with the analysis.

Tuesday, January 22, 2013

Traveler's Shares Outstanding

TRV is up 2% today after reporting another strong quarter.  Even though insurance stocks have done relatively well over the last year, Property Casualty insurance is a line of business that is often misunderstood and unloved by Wall Street.  It's a highly competitive business with few barriers to entry, but in some ways that makes the industry even more interesting to study.  If there's one thing that P/C companies understand it's that the name of their game is to grow book value per share.  To that end, they are not bashful about buying back stock when they don't have a more efficient use for capital.  As evidence, below is a chart of TRV's share count since 2005.  Over that time period, the company has bought back almost half of its shares.


Pharma Spending vs. Approvals

I came across this chart in a company presentation that I was watching today, which I thought was worth re-posting.  It shows that despite a large increase in Pharmaceutical R&D spend over the last 15 years the number of new drugs approved has not kept pace.


Friday, January 18, 2013

Mayan Apocalypse (Cross) Averted

Circling back on a slightly ridiculous market indicator that we had been tracking here: not only was the Mayan Apocalypse averted back in December, but so was the Mayan Apocalypse Cross (which we dubbed a cross over of the 50/200 month moving average).  Thanks to the rally that we've had since November the apocalypse cross never happened.  The 50 month moving average has only crossed below the 200 month twice in the last 100 years, once at the end of the 70s bear market and once in the middle of the depression.



Speaking of moving averages, the 50 and 200 day moving averages have recently crossed for 10 year interest rates.


Thursday, January 17, 2013

Monetary Base So. Close. To Breaking. Out...

The weekly update of the monetary base shows that QE is finally starting to show up on the Fed's balance sheet.  The base is very close to breaking out to a new high three full months into QE3.  As a reminder, one of the reasons we pay such close attention to the monetary base is that it's been highly correlated to oil and gold prices since QE began in 2009.

Base Money Supply Price of Oil QE

Years That the S&P 500 Never Went Negative

Last year the S&P 500 was positive for the entire year--it didn't close in the red YTD on any single day, and so far in 2013 the streak continues.  While there was little fanfare over the S&P 500's perfectly positive year, the occurrence was actually pretty rare.

Scanning data of the S&P 500 since 1957 produced only three other years that the index started the year positive and never closed negative on a YTD basis.  Below are the charts of those years: 1958, 1964, 1976 and 2012.  The returns in these years were 43%, 16%, 23% and 16% respectively.  An initial run of the data produced 12 years that were almost perfect, but 8 of those were lower on the first day of trading before heading higher for the rest of the year.







Wednesday, January 16, 2013

JPM Historical Price to Tangible Book Value

JPM reported another nice quarter this morning and the stock is now trading back near 52 week highs.  The banking industry in general has had very strong stock performance over the last six months, but especially for the "darling" banks (JPM, WFC, et al.) valuation is starting to approach historical averages.  Below is the long term history of JPM's price to tangible book ratio.  Buyers here need to believe that the multiple can continue to expand back to levels reached in the late 90s (or be comfortable with book value growth driving returns).

JP Morgan Price to Tangible Book History
JPM Price to Book HIstory
Source: Wolfram Alpha

Checking in on the Brent WTI Spread

WTI crude has relatively quietly climbed back into the mid $90 range while Brent continues to be well over the psychologically important $100 mark.  Over the last few weeks the spread between the two has narrowed slightly but is still elevated.  If the spread finally compresses in 2013 the price of WTI would increase by 20% assuming Brent holds its price.  If the global oil price were to rise on top of that, investors who primarily watch the WTI price of oil could see a significant rise.

Brent WTI Crude Oil Spread

Tuesday, January 15, 2013

FB vs. GOOG operating cash flow

Facebook announced that it will be encroaching into Google's territory with improved search functionality.  Even though the companies' market caps imply that they are close enough in size for it to be a fair fight, GOOG has a major advantage over FB in that the cash flow generated by its business is about 10x the size of FB's.  Of course it's not impossible for David to fell Goliath, but the odds are not stacked in FB's favor.








UPDATE: This probably helps explain why FB felt it would be wise to partner with MSFT which does $31B in annual cash flow (and a toehold in search) but has also had a difficult time with execution for the better part of a decade.

If this were two countries going to war here's some similar match ups based on relative GDPs:

US vs. Spain
China vs. Turkey
UK vs. Singapore
Canada vs. Kazakhstan

The Pace of Apple's Decline Compared to the S&P's '08 Crash

On the way up, people would talk about AAPL as its own asset class because of how well it used to trade relative to the S&P 500.  Now on the way down, AAPL has remained relatively uncorrelated to the index, but not in a way that most people want to see.  Apple is now down almost 30% from its peak levels hit in September of last year.  Such a steep fall would certainly be considered a crash for any other asset class.

In fact, AAPL's recent decline has paced the 2008 September-March crash quite well.  If AAPL were to continue to pace the decline it would bottom somewhere around $350.


Long Term Consumer Trends

Since the retail sales data released today by the census bureau was for December of last year we they give us an early picture of how the full year shaped up.  For all of 2012 retail sales were up a respectable 5.2%.  The auto category led the way, up 7.9%, while consumer electronics actually fell 0.8%.  Current dollar retail sales hit another all time high at $4.89T.

Taking a longer term view, below is a table showing the evolution of consumer wallet share since 1992.  Over the last 20 years Americans are spending a smaller percentage of their retail dollars on cars and at grocery stores and more at gas stations, drug stores, restaurants and online.

Percentage of Total US Retail Sales Spent on Category

Retail Sales Consumer Spending Habits

Monday, January 14, 2013

Economic Cycle and Dow Returns

Assuming that we don't run into a recession at the beginning of this year, 2013 will be the 5th year of economic expansion since recovery began in 2009.  How has the market done in the 5th year of other recoveries?

Below is the average return of the Dow Jones by year of past economic cycles.  Not surprisingly, the market tends to do the best in the first year of a recovery as securities prices and the economy slingshot back from depressed levels.  On average annual returns seem to follow a v shape pattern with the lowest rate of return coming in the 3rd year of recovery.  This is consistent with what we have seen so far in our most recent recovery.

The 5th year tends to be a good one, up 11.4%, and the 6th year tends to be decent, up 6.5%.  However only three of eleven post war expansions have made it through a 6th year.  By contrast, five have made it through a 5th year, although the breaking point tends to come in the third year--only six of eleven made it past that point.

Dow Return in Year of Economic Cycle
Recession dates based on NBER data rounded and adjusted by Avondale

Rick Santelli as Evidence of the State of the Tea Party

Rick Santelli did a Santelli exchange on CNBC this morning, which I thought was important to re-post as an indicator of how fractured the Republican/Tea Party ideology has become as a result of the beating that the Republicans took in last fall's election.

In this morning's editorial, Santelli focuses on morality and specifically concedes a few important points: 1) fiscal conservatives have the burden of proof and are going to have a hard time defending their position because 2) the election was a referendum on taxation/spending which the Republicans lost and 3) the Democrats have the short term moral high-ground because cutting deficits means withholding payments from seniors, etc.  He rounds out the editorial by warning that the long term morality of saddling future generations with debt is ultimately more important, but his tone suggested to me that he realizes that he's effectively lost the battle for the foreseeable future.  He even admits that most people "make fun" of the way he frames the debate.

Santelli is credited as an ideological father of the Tea Party movement which initially put deficit spending by government as the centerpiece of its platform (but has since been rebranded as a movement of ultra-conservative Republicans).  I suspect that he is a reasonable indicator of the general sentiment shared by many Tea Partiers who are seeing their ideology falter in public opinion.  Ultimately I think that this has some bearing on how the debt ceiling talks play out, because in 2011 freshmen Tea Partiers were leading the charge.  In the current environment they may not be so emboldened.



A Past Time of Uncertainty for Apple

It looks like Apple is set to have another rough day today as the Wall Street Journal reported that the company has cut orders for iPhone components on weak sales.  Apple shareholders are rightly worried, but perhaps can take some solace in another time that investors were skeptical and the company ended up prevailing:

It's easy to forget that for almost a year after the iPhone was initially released it actually looked like Blackberry would dominate the mobile phone market.  Recall that the original iPhone didn't have any third party apps, and the app store didn't open until a year after the first iPhone was released.  During this pre-app period there were real concerns that consumers wouldn't adopt a touch screen and that functions like BBM would draw consumers to Blackberries.  In the year after iPhone's release RIMM outperformed AAPL by as much as 75%.  Once the app store was launched all of that changed though and over time of course the iPhone became dominant.

All this is not to say that Apple shareholders are in the clear, but at least to point out that there has been skepticism about the company's operational abilities before and everything turned out alright.

AAPL vs. RIMM Performance From iPhone's 2007 Release to App Store Launch in 2008


Friday, January 11, 2013

How Bad is This Flu Season?

Frequently this time of year the weather will become a story that people start to discuss as having possible effects on the economy.  Last year the winter was abnormally warm, leading people to hypothesize that there would be better than usual economic activity.  Meanwhile in other years there is often a blizzard or two that hit the northeast and people begin to worry about how that can affect the data (usually weather worries end up being more bark than bite).

This year the seasonal story-line isn't so much about the weather as much as it is about people being under the weather.  WAG and CVS have each had good starts to 2013 based on a bad flu season.  Just how bad is the season though? Below is some data from the CDC comparing this flu season to previous ones.  So far the season is bad but not as bad as the 2009-10 pandemic when we were hit with an attack of the swine.






Source: Centers for Disease Control