The Reformed Broker
Don't miss this crucial discussion of the fact that this quarter's earnings beat rate - while high historically - is masking the fact that earnings growth just ain't all that special...
From Greg Harrison writing at Alpha Now:
While a remarkable 72.4% of the companies in the S&P 500 that so far have reported their first-quarter results have beaten analysts’ expectations – a figure that, if it holds up to the end of earnings season, would be significantly higher than the long-term average of 62% – that good news masks a slightly more bearish reality. While corporate earnings are still growing, it is at a pace that is lower than that of the fourth quarter of 2011, and a less than half that recorded during the first quarter of 2011. And as for all of those positive surprises, they aren’t quite what they seem to be either, as analysts spent much of the first quarter cutting, slashing and trimming their earnings forecasts for the companies that they cover. So to the extent that those companies now are reporting “stronger than expected” earnings, it is just as likely to be because those expectations themselves have fallen as because the company has done better. Indeed, as the overall figures indicate, the average company in the S&P 500 is likely to have posted a more sluggish growth rate in the first quarter of 2012 than it did in the year-earlier period.
Drop everything you're doing and read this fascinating look at the pricing power and loyalty mania Apple is beginning to enjoy across Southeast Asia. Blogger Peter Pham is on the ground in Vietnam and could school you on a thing or two about the region.
Keep in mind we're talking about a quarter of the world's total population or so...
Apple Inc. (NASDAQ:$AAPL) reported their latest earnings earlier in the week and it shocked a number of people, especially those who only see the world through the eyes of the West. Living in Ho Chi Minh City, Vietnam I can tell you first-hand that the market for Apple products here is nothing short of insane.
The official numbers out of China were enough to make the headlines with Apple selling iPhones at five times the rate they did in 2011. Revenue in China hit $7.9 billion up nearly 300%. In their first two quarters of 2012 they have done nearly the same amount of business they did in all of fiscal year 2011. The revenue breakdown was equally impressive for the entire Asia-Pacific region rising from 22.1% in Q2 2011 to 29.2% in Q2 2012.
Never Get Involved in an Asian Land War
It is hard for those in the West to understand just how many people live in Southeast Asia and what it means for those populations to grow economically at 5% to 10% per year for a couple of decades. Indonesia is 237 million people. Vietnam is nearly 90 million. China is more than 1.2 billion. The law of large numbers tells us that the rate at which people are moving up the economic ladder is just faster in the East than it is in the West. And those people have grown up wanting what the West has: the food, the toys, the cars, the comforts that make living life easier.
Branding is extremely important in Asia. And Apple has unparalleled brand loyalty among its users. Translating that over here where there is that desire for things American and/or European it only makes sense that Apple would evoke such a strong response.
Because if you're reading this - even if you do have an account at Morgan Stanley - there is a very good chance you are getting approximately zero shares.
Unless your account is roughly $5 million and your particular registered rep at Morgan Stanley has a profitable business to the firm (as in, he eats a lot of the "bad" syndicate and consistently sells high margin products to his clients).
My friend Nancy Miller has a rundown of what to not expect in TIME Mag today:
Fuhgeddaboudit: Individual investors are unlikely to be able to buy Facebook shares before they start trading on the Nasdaq stock exchange.
There are three reasons for this: The big boys are at the front the line, you are at the back of the line, and there is no middle of the line.
Facebook is set to sell between $5 billion and $10 billion in stock for the first time sometime next month. The eight-year-old company has already been trading shares in the private market at levels that would make it worth $90 to $100 billion – about the combined value of its underwriters Morgan Stanley and Goldman Sachs. You would think that there would be enough shares for individual investors to get some of the stock at the IPO price. But there probably aren’t, which is disappointing to investors who are hoping not just for bragging rights but big profits.
My friends at Morgan are being advised by the higher-ups to tell their clients, especially the ones who have a shot at getting shares, to curb their enthusiasm. "This will be the most undersold deal of all time in terms of how we're supposed to discuss it," is what one of them tells me.
LOL, I don't know, sorry, been a long day and I'm not getting enough servings of carbs on this new Paleo thing I'm doing....
“Ten years ago, everyone thought Mexico would be the place for expansion,” says Pete Selleck, who heads Michelin’s North American operations. “But we can’t tolerate the level of instability there.” As for China, labor costs are rising quickly, he says, and “there’s still concern about protecting intellectual property.” A new survey of 106 big U.S. manufacturers by the Boston Consulting Group, to be released Friday, picked up a similar sentiment. Thirty-seven percent of the companies said they plan to bring production back to the U.S. from China, or are actively considering it. Seventy percent said sourcing in China is more costly than it looks on paper. BCG also sees some additional interest in the U.S. from manufacturers in Europe. It says they are attracted to higher productivity here and a cheap U.S. dollar.
1. Bank of America and Morgan Stanley earnings are "good". There are some strange things going on with the DVA calculations and how they contribute/detract from the quarter, but this has been going on for months now and people on TV are talking about it so it is officially rendered a non-factor.
2. Morgan Stanley (and James Gorman) in particular are to be commended for what they've done balance sheet-wise. I still hate the stock, don't see why I'd want to be long it given the Dodd-Frank realities, low interest rates and the fact that any minute they're going to drop $10 billion on the rest of Smith Barney they don't already own. Doubling down on a melting iceberg.
3. Everyone just LOVES the American chemical stocks now. They are the primary beneficiary of low nat gas prices (one of their biggest import costs). The traders at my shop played DuPont ($DD), I didn't. I think this will be a short-lived love affair as low costs are offset by slack final demand in the end. Asian/European chemical companies are so screwed meanwhile - many of them are stuck with either crude oil or higher-priced local nat gas as their imputs.
5. If they get Qualcomm down closer to 60 I'll probably grab some. I'm long a small amount from the low 50's since 2010. I didn't see anything disappointing in the Q, guidance was cautious, not negative.
What are you thinking/seeing?
Did you see that thing at the Coachella Music Festival this weekend where they "brought Tupac back to life" as a hologram to perform alongside Dre and Snoop? It was pretty sick. Now everyone is pondering the possibilities of returning the likes of Kurt Cobain, Bob Marley, Elvis and others back to the stage using this technology. It's already been announced that a regular Tupac tour is being contemplated because of the amazing and viral response to the performance.
It turns out there's a public company behind the whole thing, it's called Domain Media Group, the ticker is $DDMG. Domain shares went banoodles this week when it was discovered that they were behind the technology itself.
Wall Street Cheat Sheet has the story...
For Tupac’s return, Digital Domain used a technique first created in 1862, in which an image is bounced off of the ground onto an invisible screen. Although Tupac’s image was not a true hologram, the performance was very eye-catching and the video went viral in a matter of hours. Furthermore, the Wall Street Journal reported on Tuesday that Dr. Dre and Snoop Dogg representatives plan to discuss logistics for a tour involving the two performers and the virtual Tupac...
The possibilities of more performances from virtual Tupac or even other deceased celebrities like Elvis sent shares of Digital Domain surging 16.5 percent on Tuesday. Before the virtual Tupac sensation, the Florida based company’s average three-month trading volume was 24,000 shares. On Tuesday, volume surged to over 764,000 shares.
DDMG did $98 million in revenues last year and lost $140 million. I haven't done more than glance at the stock so far, but I was way early on $IMAX, building my first position in the stock in 2004 when they first started converting existing films like Batman Begins to the 70mm format and retrofitting old theaters for the experience.
So I'm curious...
The headlines will all say that Retail Sales numbers for March beat expectations this morning - and technically they did - but in reality, this was the best weather we've ever seen in March across the country and we couldn't even muster a 1% rise. The data from the Commerce Department just screams lethargic consumer.
That said, the chain-store numbers were a bit brighter as it appears apparel consumers went spring shopping a bit early this year...
Store chain data released earlier were in sync with today’s report. Same-store sales for the more than 20 companies tracked by Swampscott, Massachusetts-based Retail Metrics rose 3.9 percent last month, beating the average estimate for a 3.3 percent gain, as many chains offered discounts and shoppers stocked up early on spring gear.
Sales at Gap, the largest U.S. apparel chain, climbed 8 percent. Target, the second-largest U.S. discount chain, and Macy’s Inc., the owner of Bloomingdale’s and namesake stores, each posted 7.3 percent increased. All three companies beat the average analyst projection.
Sales may have been helped by better weather as demand at building material stores climbed 3 percent, the most this year. The average temperature was 51.1 degrees Fahrenheit (10.6 degrees Celsius) in March, the warmest on record for the month in the past 117 years, according to the National Oceanic and Atmospheric Administration.
How much of April and May retail sales - if any - was pulled forward?
As I've talked about here and in the media all year, I have high hopes for the coming split-up of Conoco ($COP) from Phillips 66. I had clients in Marathon Oil a couple of years ago when they did the same thing (separating the downstream from the upstream assets) and the stock has worked out magnificently since. There is also a great deal of positive research on spin-offs; a portfolio consisting of parent and child from every split in the S&P from 2007 through year-end 2011 has handily beaten the S&P.
We're long Conoco across almost all client accounts in varying amounts, it is one of our few high conviction longs.
So with that in mind, you'll understand my delight at seeing my investment thesis laid out by one of my favorite financial writers in the game for this week's Barron's. Here's Michael Santoli with his take on the coming spin-off/distribution:
INTEGRATED-ENERGY BIGGIE ConocoPhillips (ticker: COP) is spinning off its refining-and-marketing arm -- the largest such business among the U.S. majors -- as Phillips 66 at the end of the month. And investors should note the opportunity that will probably arise from the split.
Conoco, the integrated major least favored by Wall Street, is following Marathon Oil (MRO) in separating its so-called downstream assets (pipelines, refining, retail gasoline operations) from its core production business. The latter is low-margin but predictable, and Phillips 66 benefits from impressive scale. Conoco holders will receive one share in the new company (to be traded under the symbol PSX) for every two Conoco shares.
While "when issued" trading in the new shares won't begin until April 12, analysts plugging in industry-average cash-flow valuations on each business figure that the combined value is around $92 or $95 per Conoco share, or more than 20% above Conoco's latest quote of 75.36.
Following the spinoff, ConocoPhillips shares are expected to carry a dividend yield around 4%; Phillips 66, closer to 2%. The latter company will have a seasoned executive team, a good balance sheet, and an ability to make acquisitions and potentially further exploit the value of its pipeline assets.
This is a bit of market commentary that's absolutely staggering in terms of its honesty and the selflessness of the speaker. If you've not heard of Dan Fuss, he's the legendary mutual fund manager who runs the Loomis Sayles Bond Fund, an institutional favorite for Dan's ability to go anywhere in search of fixed income market alpha.
Dan's been trading bonds since the Civil War (or for more than 50 years, but who's counting) and he regularly makes it to the top of all the lists for excellence and stewardship etc.
Anyway, here's Dan on the coming bond bear market (via Investment News):
“We're in the foothills of a gradual rise in interest rates,” said Mr. Fuss, vice chairman of Loomis Sayles & Co. LP and manager of the $21.2 billion Loomis Sayles Bond Fund (LSBRX). “Once they start to rise, you're probably looking at a 20- or 30-year secular trend of rising interest rates.”
When interest rates go up, the value of existing bonds drops as new bonds are issued at the higher rates.
The unemployment rate is going to be the main factor in when the Federal Reserve Bank starts to raise interest rates in earnest, Mr. Fuss said.
If the unemployment rate falls to between 6% and 7%, it's likely that the Fed will stop buying up two-year Treasury notes and 30-year Treasury bonds, which has been keeping the interest rate on the 10-year Treasury bill artificially low, Mr. Fuss said.
“Once that happens, you need to get out of the market risk that's in fixed-income and into the company-specific risk you can find in stocks,” he said.
Now of course, the bull case for equities is that this rise in rates happens gradually and under the control of the Fed and for the right reasons (such as the employment one laid out above).
You'll not here this kind of anti-bond, pro-equity thesis from a great many fixed income managers, for obvious reasons. But when you've been around as long as Fuss, it's no longer about the AUM, it becomes more about the challenge and the work itself being good work. Thanks, Dan.
Make yourself useful.
It is the surest path to success in business, it is more important than salesmanship, presentation, image or any degree you may have attained in school.
Take it from someone who spent ten years pushing a boulder up a hill for no reason other than I thought it was what I was "supposed to be doing."
When you make yourself useful, at a certain point the boulder begins rolling downhill - and it becomes a snowball, picking up business contacts, key connections and dollar bills all the way down. It gets easier to push and in many cases, needs to be slowed down if anything.
I bumped into some of my old broker friends down on Wall Street the other day. They are still pushing the boulder up a hill - still concocting ways to sell people things they don't need or want. Still not making themselves useful. Still slaving away in a hopeless enterprise because they don't know any better or have given up. And they know it. It is written on their faces and can be seen in their eyes. Futility and frustration, it coats their throats so that even when they speak optimistically - "Livin' the dream!" - you still know deep down how useless they feel.
Working hard is not the same as making your work hard for you.
The great personal stories on The Street all have very specific arcs:
1. Rags to Riches
3. The Man Who Believed When No One Else Did
4. The Conquering Hero
5. Worked His Way Up From The Mailroom
The common thread through all of those stories is that our hero figures out how to become useful to his industry, his firm and a wide pool of potential clients and colleagues.
Carl Icahn once told his personal story at an event I attended and it stuck with me. Most people don't know this but when Carl was first starting out, he was a broker in search of clients (sound familiar?). He found a niche as one of the most knowledgeable options traders on The Street at a time when options mystified a great many market players. He owned that niche and the clients came to him. He was able to build up quite a commission base simply by virtue of how useful he had made himself. That commission base gave him a platform to jump up from to the next rung and then the next.
He's now a billionaire who has no need of clients or taking outside money - the dream of almost every player in the markets.
Are you making yourself useful? It is hard to be an expert on everything and to be good at it all. Here's a shortcut - find something you can be very good at, preferably something you are genuinely interested in and will have the patience to excel at. Learn everything about your niche you can and then start writing and talking about it where people will hear you. Make yourself the center of the discussion of that one thing. Care deeply and keep exploring the topic every chance you get.
Make yourself useful. Then sit back and watch your boulder become a snowball.