I rarely find that longtime banking analyst Dick Bove has much of interest to say. His buy ratings on large banks are often so short-term as to be encouraging retail investors to time their trading to quarters.
But this morning, Bove had several useful comments regarding BofA CEO Brian Moynihan's so-called Tuesday afternoon massacre, in which Sally Crawchuck and Joe Price, both consumer senior executives, were fired. Two institutional banking executives were elevated in rank.
Bove sees the moves as reasonable reactions to Dodd-Frank, which has made consumer banking more difficult and less profitable. He further forecast 600 branch closures and 30,000 employees shed on the consumer side of BofA in the next two years, as the bank shifts resources from consumer to institutional businesses.
That makes sense.
But perhaps the shrewdest insight Bove made was one worthy of my old boss, Gerry Weiss, of Chase Manhattan Bank. By reshuffling senior executives, Moynihan, in Bove's opinion, bought himself several years time as CEO.
It's an old trick, yet, still works. A struggling CEO, rather than wait for the board to fire him, moves first and rearranges the deck chairs himself. This allows him to do three things: blame the fired execs for problems, claim to be (and look) forceful in making the changes, then, most importantly, use the new appointments to buy himself time while the newly-promoted managers and organization structures pan out.
It should not surprise that CEOs using these maneuvers are typically the ones whose companies are in the most trouble. Here, Bove and I part company. I believe Bove, with Tom Brown, predictably, both reacted with even more praise for the large, stumbling bank.
I believe it signals just how troubled BofA actually is. Moynihan's had plenty of time to do this, and Dodd-Frank is a year old. Either he's slow- take that any way you wish- or he realized, with this summer's appalling collapse of BofA's stock price, that if he didn't act soon, he'd be out.
Showing posts with label Analysts. Show all posts
Showing posts with label Analysts. Show all posts
Wednesday, September 07, 2011
Wednesday, August 31, 2011
A Reminder of Why Sell-Side Analysts Add So Little Value
On Monday I caught the second half of Tom Keene's noontime Bloomberg program. Within the space of just 20 minutes, I had two reminders of why sell side analysis provides so little value to investors.
First, I caught Citigroup's Deane Dray's monologue on why he prefers GE instead of UT.My 2008 post on the two conglomerates couldn't be more different. Dray essentially cast doubt on UT's decades of consistent performance, while essentially arguing for a timing play on GE.
The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.
Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.
Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.
Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.
Moreover, Miller missed the essence of what BofA really is. At its core is, of course, the old BofA retail California franchise. But to that has been glued North Carolina National Bank's, a/k/a Hugh McColl's Nationsbank's dispersed bank acquisitions in the Southeastern US, plus, later, by McColl's lieutenant, Ken Lewis, the dying Countrywide and staggering Merrill Lynch. Which is to say, an unfocused mess of a financial utility which paid too much for its last two mistakes, which were pursued in the same spirit of the banking acquisitions which bulked up the original NCNB. In fact, BofA itself was stumbling when Nationsbank captured it in 1998.
The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.
You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.
Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.
The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.
Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.
Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.
Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.
The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.
You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.
Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.
Monday, August 15, 2011
Last Week's US Equity Markets & P/E Ratios
On last Wednesday, I wrote this post discussing equity markets performances at the half-way point of the week. Since then, the S&P finished the week at a net loss of just -1.7%. But, of course, this grossly understates what actually transpired.
We saw a week of daily S&P returns of -6.7%, -4.4%, +4.6% and +4.7%. My own volatility measures jumped almost two-fold by the end of the week.
Yet at least one Bloomberg co-anchor attempted to assure viewers that it wasn't such a bad week after all, with such a modest net decline in the major equity averages.
Give me a break. The average retail investor probably bailed out somewhere near a bottom point, no doubt losing about as much as one could. This sort of behavior have been well-documented by Charles Schwab's previously-discussed research.
But I had to laugh at the Wall Street Journal's Money & Investing Section's lead article in this morning's edition. Clinging to hoary old notions of the importance of P/E ratios in a predictive sense, the article focused on recent declines in the 'P,' with forecasted declines in the 'E,' as well. Then there was the requisite nod to trailing versus forecasted earnings, etc.
Too bad none of this actually has anything to do with total returns. My proprietary research has convinced me that dwelling on P/Es is a mistake, since it's a product of primary drivers of performance, not a driver itself.
Further, it's a static measure attempting to capture time and trend. But it can't. Instead, various pundits and analysts ascribe all manner of benefits or drawbacks to using various massaged measures of the numerator or denominator in order to try to give it some rationale and technical luster.
I don't buy any of it.
Rather, I look at my market turbulence signal, and find that it is quite far from registering a market which one should leave, or short. My equity selections continue to nicely outperform the S&P.
For a lot of reasons, developed economies may be entering a period in which revenue growth for top performing firms slows. But, at least for now and the near future, it doesn't appear that it's time to panic if one holds the right equities, or even, for that matter, the S&P500.
We saw a week of daily S&P returns of -6.7%, -4.4%, +4.6% and +4.7%. My own volatility measures jumped almost two-fold by the end of the week.
Yet at least one Bloomberg co-anchor attempted to assure viewers that it wasn't such a bad week after all, with such a modest net decline in the major equity averages.
Give me a break. The average retail investor probably bailed out somewhere near a bottom point, no doubt losing about as much as one could. This sort of behavior have been well-documented by Charles Schwab's previously-discussed research.
But I had to laugh at the Wall Street Journal's Money & Investing Section's lead article in this morning's edition. Clinging to hoary old notions of the importance of P/E ratios in a predictive sense, the article focused on recent declines in the 'P,' with forecasted declines in the 'E,' as well. Then there was the requisite nod to trailing versus forecasted earnings, etc.
Too bad none of this actually has anything to do with total returns. My proprietary research has convinced me that dwelling on P/Es is a mistake, since it's a product of primary drivers of performance, not a driver itself.
Further, it's a static measure attempting to capture time and trend. But it can't. Instead, various pundits and analysts ascribe all manner of benefits or drawbacks to using various massaged measures of the numerator or denominator in order to try to give it some rationale and technical luster.
I don't buy any of it.
Rather, I look at my market turbulence signal, and find that it is quite far from registering a market which one should leave, or short. My equity selections continue to nicely outperform the S&P.
For a lot of reasons, developed economies may be entering a period in which revenue growth for top performing firms slows. But, at least for now and the near future, it doesn't appear that it's time to panic if one holds the right equities, or even, for that matter, the S&P500.
Tuesday, July 19, 2011
Tom Brown At It Again
Just last week I wrote this post discussing Tom Brown's gung ho, self-serving talking of his bank sector equity portfolio book on Bloomberg.
Unbelievably, he was back at it again this morning on the same network. This time it was to bemoan Goldman Sachs' disappointing earnings announcement, specifically its trading revenues.
Facing obviously uneven results in the banking sector, Brown had to act fast on air to try to convey why investors should remain interested in banks with such earnings problems.
What came next was something for which I was unprepared- old fashioned Wall Street sell-side hucksterism.
Brown harked back over 20 years to when, he so modestly disclosed, he had coined a now-famous meaning for BofA's ticker, BAC- "Buy All you Can."
Wow. I mean, how much more distilled can Brown's brilliance get? And it's so long-lived, too! Over twenty years!
I first heard this sort of nonsense years ago when I briefly dated a stock broker. She repeated the apocryphal phone patter for me by rote, in her thick Brooklyn accent,
"If you liked it at 60, you'll love it at 50 and you marry it at 40."
In short, declines are always and only opportunities to buy before the equity swings ever-upward again. Colossal management mistakes which led to current losses are surely one-time gaffes. These same managers, or their successors, will never- never- make another mistake of similar size. Really. Trust him. It's safe now. This time, it'll be different.
This morning, Brown went on to forecast, somewhat murkily, that in six quarters, BofA would be doing just fine, so load up on it now.
Funny thing about those pesky investors- they actually don't like to be told to wait six quarters for a return. They prefer constant, positive returns, when possible. And when you're counseling investors to buy and wait for a stock in a sector that cratered so badly in 2008 that it had to receive a federal bailout of unprecedented proportions, it is not a comforting recommendation. A lot can happen in six quarters.
But consider Tom Brown's dilemma.
If he tells the truth- that the large-bank sector is moribund, populated by slow-moving, heavily-regulated financial leviathans which are only good as very risky timing plays, retail investors will leave his fund.
If he tells the truth that right now just isn't the best time to buy large-bank stocks, retail investors will leave his fund.
Brown's objective is to say things, preferably on air, appearing as an objective analyst, rather than an interested portfolio manager, which keep his investors in his bank stock portfolio fund.
Once investors sell out of his fund, they may never return, captured by some other manager's line about some other sector. Perhaps technology, or cloud investing, or even gold and other commodities.
So Brown must act quickly to prevent such redemptions and departures.
In this light, BofA's recent large losses become an opportunity to buy low. Goldman's lower trading revenues? You should love it even more at its new low price!
Witch hunts on Wall Street come and go. New regulations, like Dodd-Frank, come and go.
But basic, unvarnished sell-side Wall Street hucksterism of Tom Brown's variety never, it seems, goes out of style.
Unbelievably, he was back at it again this morning on the same network. This time it was to bemoan Goldman Sachs' disappointing earnings announcement, specifically its trading revenues.
Facing obviously uneven results in the banking sector, Brown had to act fast on air to try to convey why investors should remain interested in banks with such earnings problems.
What came next was something for which I was unprepared- old fashioned Wall Street sell-side hucksterism.
Brown harked back over 20 years to when, he so modestly disclosed, he had coined a now-famous meaning for BofA's ticker, BAC- "Buy All you Can."
Wow. I mean, how much more distilled can Brown's brilliance get? And it's so long-lived, too! Over twenty years!
I first heard this sort of nonsense years ago when I briefly dated a stock broker. She repeated the apocryphal phone patter for me by rote, in her thick Brooklyn accent,
"If you liked it at 60, you'll love it at 50 and you marry it at 40."
In short, declines are always and only opportunities to buy before the equity swings ever-upward again. Colossal management mistakes which led to current losses are surely one-time gaffes. These same managers, or their successors, will never- never- make another mistake of similar size. Really. Trust him. It's safe now. This time, it'll be different.
This morning, Brown went on to forecast, somewhat murkily, that in six quarters, BofA would be doing just fine, so load up on it now.
Funny thing about those pesky investors- they actually don't like to be told to wait six quarters for a return. They prefer constant, positive returns, when possible. And when you're counseling investors to buy and wait for a stock in a sector that cratered so badly in 2008 that it had to receive a federal bailout of unprecedented proportions, it is not a comforting recommendation. A lot can happen in six quarters.
But consider Tom Brown's dilemma.
If he tells the truth- that the large-bank sector is moribund, populated by slow-moving, heavily-regulated financial leviathans which are only good as very risky timing plays, retail investors will leave his fund.
If he tells the truth that right now just isn't the best time to buy large-bank stocks, retail investors will leave his fund.
Brown's objective is to say things, preferably on air, appearing as an objective analyst, rather than an interested portfolio manager, which keep his investors in his bank stock portfolio fund.
Once investors sell out of his fund, they may never return, captured by some other manager's line about some other sector. Perhaps technology, or cloud investing, or even gold and other commodities.
So Brown must act quickly to prevent such redemptions and departures.
In this light, BofA's recent large losses become an opportunity to buy low. Goldman's lower trading revenues? You should love it even more at its new low price!
Witch hunts on Wall Street come and go. New regulations, like Dodd-Frank, come and go.
But basic, unvarnished sell-side Wall Street hucksterism of Tom Brown's variety never, it seems, goes out of style.
Friday, July 15, 2011
Bank Stock Portfolio Manager Tom Brown Talks His Book On Bloomberg This Morning
I happened to catch bank sector portfolio manager and long-ago bank stock analyst Tom Brown's appearance on Bloomberg television this morning. The occasion was apparently yesterday's Chase earnings release.
Listening to/watching Brown was fascinating, in that he was questioned, and answered, as if he were simply a bank stock analyst, as he once was.
But, in reality, the entire episode was Bloomberg's way of doing bank stock portfolio manager Tom Brown a big, big favor, letting him talk his book without advertising it.
For example, Brown kept downplaying the capital inadequacy of the big four US banks- BofA, Chase, Citi and WellsFargo. He continually claimed that they have "til 2017" to reach then-required capital levels, and would do so with so much extra capital that they'll 'have to buy back stock' with the surplus.
Then he decried those who would worry that Chase used significant loan loss reserves to boost this past quarter's profit.
Brown also excelled at turning the anchors' questions to topics he wanted to highlight, such as his forecast that all the major banks would be growing loans and business volumes in 2012, thus making now a great time to buy before the profits roll in.
I've been following Brown's comments on Bloomberg for a few months now, and the last word you'd use to describe them is objective.
The truth is, Brown has to have a reason to push owning bank stocks, so no news is ever bad. Good earnings mean jump on the bandwagon, while lackluster results mean buy before performance improves.
Never mind that Brown evidently piled into BofA before its shares plummeted on higher capital concerns and the expensive mortgage loan distribution settlement it announced recently.
No, the bank sector is just wildly attractive, in Brown's view. No chance that a faltering economy could cause renewed credit problems, slow loan growth and generally stagnant performance.
As I listened to him predict how much profitable growth would occur at the four large banks from now until 2017, I considered how much trouble those same banks had managed to run into just from 2006-08. A fraction of the timeframe over which Brown is forecasting such bountiful banking profits.
But I'm sure such losses like those recent mortgage problems will never recur, will they Tom?
Listening to/watching Brown was fascinating, in that he was questioned, and answered, as if he were simply a bank stock analyst, as he once was.
But, in reality, the entire episode was Bloomberg's way of doing bank stock portfolio manager Tom Brown a big, big favor, letting him talk his book without advertising it.
For example, Brown kept downplaying the capital inadequacy of the big four US banks- BofA, Chase, Citi and WellsFargo. He continually claimed that they have "til 2017" to reach then-required capital levels, and would do so with so much extra capital that they'll 'have to buy back stock' with the surplus.
Then he decried those who would worry that Chase used significant loan loss reserves to boost this past quarter's profit.
Brown also excelled at turning the anchors' questions to topics he wanted to highlight, such as his forecast that all the major banks would be growing loans and business volumes in 2012, thus making now a great time to buy before the profits roll in.
I've been following Brown's comments on Bloomberg for a few months now, and the last word you'd use to describe them is objective.
The truth is, Brown has to have a reason to push owning bank stocks, so no news is ever bad. Good earnings mean jump on the bandwagon, while lackluster results mean buy before performance improves.
Never mind that Brown evidently piled into BofA before its shares plummeted on higher capital concerns and the expensive mortgage loan distribution settlement it announced recently.
No, the bank sector is just wildly attractive, in Brown's view. No chance that a faltering economy could cause renewed credit problems, slow loan growth and generally stagnant performance.
As I listened to him predict how much profitable growth would occur at the four large banks from now until 2017, I considered how much trouble those same banks had managed to run into just from 2006-08. A fraction of the timeframe over which Brown is forecasting such bountiful banking profits.
But I'm sure such losses like those recent mortgage problems will never recur, will they Tom?
Wednesday, July 06, 2011
Regarding Analysts' Estimates
As earnings season for US equities begins this quarter, it's worthwhile to take note of a recent Wall Street Journal column by Jason Zweig concerning analysts' earnings estimates.
Consider this gem,
"On average, according to Denys Glushkov, research director at WRDS, stock analysts are revising their earnings forecasts nearly twice as frequently as they did a decade ago. And while the typical forecast missed the mark by 1% in the 1990s, that margin of error has lately been running at triple that rate."
Which is sort of shocking, since I recall back in 1997, my business partner at the time noted how analysts' earnings estimate errors had risen significantly from prior years. Even then, analysts' estimates had become somewhat of a joke.
Now, a decade and a half later, they've deteriorated even more.
Zweig goes on to describe a process by which companies actively guide estimates and play games in order to make sure that their actual earnings announcement is a bona fide "surprise."
Again, from Zweig,
"In the first quarter of 2011, according to Bianco Research, 68% of the companies in the S&P500 earned more than the consensus, or median, forecast by analysts. What's more, that quarter was the ninth in a row when at least two-thirds of the companies in the S&P generated positive surprises- and the 50th consecutive quarter in which at least half of the companies surpassed the consensus forecast of their earnings."
My equity portfolio selection process has never used anything but historic information. However, I recall, back in 1998, that the hedge fund with which I was collaborating was investigating another person's work claiming to add value to equity selections by analyzing earnings estimates. Apparently it looked very promising. But after a few months of scrutiny and testing, whatever alleged value in the method was found to be non-existent.
Still, the process employs a lot of people at sell-side brokerages and buy-side funds. So I guess, despite its relative lack of usefulness, the process of estimating corporate earnings adds value by keeping some people on payrolls in the financial services industry.
Meanwhile, you might think about this topic and post in the next few weeks, as all those earnings "surprises" roll in among S&P500 companies.
Consider this gem,
"On average, according to Denys Glushkov, research director at WRDS, stock analysts are revising their earnings forecasts nearly twice as frequently as they did a decade ago. And while the typical forecast missed the mark by 1% in the 1990s, that margin of error has lately been running at triple that rate."
Which is sort of shocking, since I recall back in 1997, my business partner at the time noted how analysts' earnings estimate errors had risen significantly from prior years. Even then, analysts' estimates had become somewhat of a joke.
Now, a decade and a half later, they've deteriorated even more.
Zweig goes on to describe a process by which companies actively guide estimates and play games in order to make sure that their actual earnings announcement is a bona fide "surprise."
Again, from Zweig,
"In the first quarter of 2011, according to Bianco Research, 68% of the companies in the S&P500 earned more than the consensus, or median, forecast by analysts. What's more, that quarter was the ninth in a row when at least two-thirds of the companies in the S&P generated positive surprises- and the 50th consecutive quarter in which at least half of the companies surpassed the consensus forecast of their earnings."
My equity portfolio selection process has never used anything but historic information. However, I recall, back in 1998, that the hedge fund with which I was collaborating was investigating another person's work claiming to add value to equity selections by analyzing earnings estimates. Apparently it looked very promising. But after a few months of scrutiny and testing, whatever alleged value in the method was found to be non-existent.
Still, the process employs a lot of people at sell-side brokerages and buy-side funds. So I guess, despite its relative lack of usefulness, the process of estimating corporate earnings adds value by keeping some people on payrolls in the financial services industry.
Meanwhile, you might think about this topic and post in the next few weeks, as all those earnings "surprises" roll in among S&P500 companies.
Friday, June 03, 2011
Tom Brown's BofA Call
I happened to catch long time bank analyst, now, a sector portfolio manager, Tom Brown's appearance on Bloomberg television yesterday.
During his interview, Brown disclosed that for the first time in years, his fund has gone long BofA equity.
When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.
Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.
Wow. That's some performance!
If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.
Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?
It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.
Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.
When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.
Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.
Wow. That's some performance!
If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.
Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?
It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.
Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.
Saturday, May 21, 2011
Discipline: The Difference Between Amateur Investing & Professional Portfolio Management
I was recently reminded of a key difference between amateur investors and professional portfolio managers.
Several months ago, a former business partner who had failed to perform according to his obligations, obtained equity selection information for last November. Being information, I could not unsend it, and, with his continued failure to perform, I wasn't going to manage his equity investments for free.
As it happened, he had asked me to accept trading authorization for an equity account, which placed me on the firm's list for duplicate confirms and statements. Thus, I was able to observe his attempts at using the November information.
Despite his having been familiar with my portfolio management approach and discipline for over four years, as an amateur, he stumbled badly in his attempt to emulate my management of his portfolio.
First, he dithered for nearly four months before deciding to buy the equities which my process selected in November. Since each portfolio has a six-month duration, this was a significant mistake on his part. But he compounded that error by investing in some, but not all of the equities in the portfolio.
As I reviewed his holdings at the end of April, when the November portfolio would be traded to conform to May's selections, I noted that his account's performance was roughly 10%, or less than half of my November's portfolio's full term gross performance.
Significantly, one of the equities he failed to buy had the second-highest total return in the portfolio. Omitting that equity not only denied its excellent return, but, due to weighting effects, caused him to buy more of the lower-return equities in the portfolio. Only two of the other issues underperformed the S&P, and not by much, whereas the rest of the portfolio widely-outperformed the index since November, resulting in a gross total return nearly twice that of the S&P500 for the period.
I have taken heed of James O'Shaughnessy's advice to quantitatively-oriented portfolio investors that they should adhere to their model, not second-guess it. My former partner and I had discussed this important point often. Thus, I thought he understood the importance of disciplined investing.
But, in the final analysis, his amateur nature was displayed by his inability to practice the discipline of investing according to an approach which he knew would, when followed faithfully, significantly outperform the S&P.
Several months ago, a former business partner who had failed to perform according to his obligations, obtained equity selection information for last November. Being information, I could not unsend it, and, with his continued failure to perform, I wasn't going to manage his equity investments for free.
As it happened, he had asked me to accept trading authorization for an equity account, which placed me on the firm's list for duplicate confirms and statements. Thus, I was able to observe his attempts at using the November information.
Despite his having been familiar with my portfolio management approach and discipline for over four years, as an amateur, he stumbled badly in his attempt to emulate my management of his portfolio.
First, he dithered for nearly four months before deciding to buy the equities which my process selected in November. Since each portfolio has a six-month duration, this was a significant mistake on his part. But he compounded that error by investing in some, but not all of the equities in the portfolio.
As I reviewed his holdings at the end of April, when the November portfolio would be traded to conform to May's selections, I noted that his account's performance was roughly 10%, or less than half of my November's portfolio's full term gross performance.
Significantly, one of the equities he failed to buy had the second-highest total return in the portfolio. Omitting that equity not only denied its excellent return, but, due to weighting effects, caused him to buy more of the lower-return equities in the portfolio. Only two of the other issues underperformed the S&P, and not by much, whereas the rest of the portfolio widely-outperformed the index since November, resulting in a gross total return nearly twice that of the S&P500 for the period.
I have taken heed of James O'Shaughnessy's advice to quantitatively-oriented portfolio investors that they should adhere to their model, not second-guess it. My former partner and I had discussed this important point often. Thus, I thought he understood the importance of disciplined investing.
But, in the final analysis, his amateur nature was displayed by his inability to practice the discipline of investing according to an approach which he knew would, when followed faithfully, significantly outperform the S&P.
Saturday, May 14, 2011
The Folly of Sector Focus: "The Case for Bank Stocks"
Randall Smith of the Wall Street Journal wrote a weekend edition column entitled The Case for Bank Stocks. It's a fine example of why you should be wary of people who write columns on investing in media for which you pay. I don't follow Smith's writing in the Journal, so I don't know if his piece was a one-off piece that represents his big break in writing at the Journal, or a frequently-appearing column. It doesn't have a clever heading, so Smith probably hasn't yet attained the status of his fellow Journal investment columnist whom I also find dangerously naive and narrow-minded, James Stewart.
Now that I think of it, the only two routinely-appearing Journal writers in the Money & Investing section which I find generally sound and interesting are Kelly Evans and Dennis Berman. Neither is confined to a single sector or topic.
Just like their actual kindred spirits in sell-side analysis or sector portfolio management, journalists who focus solely on either investing, or a sector, have a recurring problem. They must publish tantalizing pieces on a fixed schedule, and the pieces must at least appear to provide some fresh insight or value, regardless of whether, for sector-focused analysts and portfolio managers, it's just a bad time to be in that sector.
But this flies in the face of legendary Vanguard Group founder John Bogle's dictum,
'Don't just do something- stand there,' which captures his well-regarded and empirically-proven contention that passive index investing will provide most retail investors with comparatively better returns at lower risks for the long term.
However, in keeping with why I originally began this blog, I decided to read and dissect Smith's article to see what sort of sense it makes. Passages from his piece are in italics.
Bank stocks rocketed out of the financial crisis in 2009, helping to ignite a bull market that has lasted more than two years.
This sort of anthropomorphizing of "the market" is an old journalist's trick to get you to regard equities emotionally, and actually believe they possess some sort of animus of their own. They don't. It's also an attempt to portray what may be simple correlation as causation, which also takes much more work to prove.
But in the past year, they have lagged the broader U.S. market. While the Standard & Poor's 500-stock index has risen 15.6%, a widely watched measure of bank stocks, the KBW Bank Index, has fallen 10%.
Now, as the economy moves from recovery mode to full-fledged expansion, some market strategists and advisers say bank stocks should outperform once again.
Christ, is it me, or does Smith sound like the pitchmen on the frequently-appearing 'invest in gold' ads on cable business channels? Does it get more hackneyed than "some....strategists...say banks stocks should outperform once again?"
"As the economy improves, we're seeing capital-markets activity picking up, credit trends improving dramatically, problem loans and delinquencies falling, and loan demand picking up—all the classic signs of an early-stage recovery," says William Tanona, a bank-stock analyst at UBS AG.
Wow, I'm impressed with Tanona's insights. But, wait....he's a bank-stock analyst! At UBS. Which really means he's a bank-stock sales support publicist at UBS. If bank stocks become uninteresting, Tanona's going hungry. So I'm sure his remarks are always totally objective.
The case for bank stocks has three main prongs. First and foremost, banks look cheap. On average, bank stocks trade at just 0.9 times their book value per share, while their average for the seven years before the meltdown of 2008 was about two times, Mr. Tanona says.
While current valuations reflect investors' fears about new regulations and higher capital requirements, Mr. Tanona says multiples should rise "once asset quality normalizes and firms adjust for all the regulatory, legal and capital requirements."
Seriously, I had to stop laughing at this point before continuing my comments. First, we have the old 'they sure look cheap historically' argument. Meaning past is prologue. Except that all investment literature must state that prior performance is no guarantee of future performance, etc. Then that second paragraph, which essentially disguises the truth that nobody knows how Dodd-Frank will hobble these leviathans.
My longtime financial business colleague B, and I, both believe that the largest remaining US banks are now slow-moving utilities incapable of surprising growth for extended periods of time. They are essentially heavily-regulated, quasi-governmental finance arms which are so heavily insured and regulated as to be pointless as investments.
J.J. Schenkelberg, an investment adviser at CLS Investments LLC in Omaha, Neb., says her firm has put about $50 million of its $8 billion of client assets into an exchange-traded fund tracking the KBW Bank Index because the stocks are "quite attractively valued" based on their price-to-book ratio. "With these types of valuations, they are still overly punished" for the financial system's near-meltdown, she says.
I love it when sell-side, or even buy-side analysts stumping as sales people for their funds, use P/E ratios as causal, rather than consequential. My proprietary research found P/E ratios to be meaningless and unrelated statistically to consistently superior performing companies as measured by total return.
The prospect of rising interest rates in the next few years also bodes well for banks, say some strategists. In that scenario, banks' so-called net interest margin, a measure of the money banks earn by making loans, would increase, says analyst Chris Kotowski of Oppenheimer & Co. That's because, in a rising-rate environment, banks can usually raise the rate on their loans faster than they have to raise the rates on their deposits.
Some banks also say they can reinvest some of their assets more profitably once rates rise and regulators loosen controls over their reserves. Two of the largest banks by assets, Bank of America Corp. and J.P. Morgan Chase & Co., "are both positively positioned for rising rates," Mr. Tanona says. Others say Citigroup Inc. is, too.
At Wells Fargo & Co., redeploying just half of a $100 billion short-term cash trove could boost pretax profits by $880 million a year, analyst Chris Mutascio of Stifel Financial Corp. told Wells executives on a conference call last month. "I would not disagree with your math," replied Wells Chief Financial Officer Tim Sloan.
Other potential beneficiaries of rising rates include Bank of New York Mellon Corp., Charles Schwab Corp., and Federated Investors Inc., all of which would be able to recapture fees waived due to rock-bottom interest yields on money-market funds. "These companies automatically get a benefit when rates go up," says Frederick Cannon, director of research at Keefe, Bruyette & Woods.
As profits improve, banks are likely to boost their dividend payments, say analysts. Banks slashed their payments during the financial crisis to preserve capital. Now that the crisis has ebbed, regulators are allowing banks to return more cash to shareholders. Nineteen banks have raised their payouts so far in the second quarter, on top of the 39 that did so earlier in the year. Among those that did so after regulators approved their capital plans: J.P. Morgan Chase, Wells Fargo and U.S. Bancorp.
As a result, while the KBW Bank Stock Index currently yields about 0.9%, KBW's Mr. Cannon expects it to increase to 1.9% over the next year. He says that, in turn, should attract buyers to the stocks.
Not all banks are likely to boost their payments at the same time. Investors were surprised in March when one bank, BofA, saw its dividend plan rejected by regulators.
It's true, and I've written about this in prior posts, from my own knowledge as a Chase Manhattan officer years ago, that most people don't realize banks generally benefit from higher rate environments. But this is the sort of thing that the thousands of sell-side and buy-side bank analysts all spend their time estimating. So it's not on the order of, say, surprise growth at Apple or Priceline. And you'd be basically, according to Smith and his sources, buying now, to hope that, sometime after Helicopter Ben raises rates, or things go wrong in the US economy and nervous investors cause risk-free Treasury rates to soar as they shun debt auctions, these large banks will benefit from some liquid assets redeployed at higher rates.
Never mind that, in this economic environment, those higher rates might actually choke off economic growth and demand for loans. A trivial concern, I am sure.
The banking sector isn't a cakewalk these days. Some analysts warn that banks must adjust to a new lending reality that includes a retreat from the wild-west days of mortgages with zero down payments, no income documentation and other loose lending standards.
"It will take banks years to adapt" to an environment of mortgages with 20% down payments, says bank analyst Nancy Bush, a consultant with SNL Financial Corp.
I'm old enough to remember Nancy Bush as a young sell-side analyst, along with Tom Brown and Mike Mayo. She's seen a lot, and her cautionary words are appropriate. By the way, if it does take banks "years to adapt" to this new environment, doesn't that suggest that resulting profits could be lower and later than the (smirk) totally objective sell-side analysts contend?
One drag on banks' loan growth in recent years has been the need to shed legacy portfolios of toxic assets they either inherited from previous management, in the case of Citigroup, or acquired in acquisitions, in the case of J.P. Morgan Chase, Wells Fargo and BofA. One bank with a big slug of for-sale assets, Citigroup, is only about halfway through that runoff.
Ah, yes. Those pesky "legacy portfolios." That's what sell-side analysts and bank managements like to call the resulting toxic relics of their last big errors in judgement. But don't worry. Really. They've learned all their lessons and nothing remotely like those mistakes will ever happen again. Really. Everybody agrees- the sell-side analysts, the bank managements, the regulators caught napping lasting. Everyone! Even Randall Smith!
So, go ahead, invest already!
Still, Todd Green, chief investment officer at Alesco Advisors LLC in Rochester, N.Y., which owns $15 million of the same KBW bank fund, the SPDR KBW Bank ETF, expects bank stocks to rally as lenders reinstate or raise their dividends, mergers pick up and valuations bounce off their recent lows.
Bank stocks, he says, represent "an attractive opportunity in this market to buy high-quality companies at low prices, in an industry that's essential to the functioning of capitalism in the U.S."
Let's see....Todd Green's funds own a big chunk of bank ETFs. Todd would like you to believe, as he does, that banks will be hot. So Todd's investments, bought at lower values, will benefit from your stampede into, well, hopefully the very same ETFs that Todd's firm bought for its clients.
No lack of objectivity there, huh?
Mind you, these so-called "high quality" companies are the same ones which accepted government bailouts and heavy consequent oversight. Are these low prices? Why?
If the prices rise due to equity index rises, maybe the S&P500 is safer.
Then there's the real proposition that would likely infuriate John Bogle.
This entire article, and all the supportive material, argue for market timing. Pure and simple. But market timing is notoriously unreliable and largely the province, when successful, of seasoned professionals who also have the benefit of legal market intelligence that retail investors lack.
It's always curious to me that analysts expect people to buy and hold in hopes of some future gains, while they know that what investors want is gains now...and in the future. I know of no professional fund managers who believe that telling investors to just wait through poor or negative returns now for future better returns will retain their capital. Market timing propositions, which is what Smith's piece is, fly in the face of seeking consistently good investment performance.
Finally, Green engages in a bit of suspect logic. Banks may be "essential to the functioning of capitalism in the U.S.," but that does not mean they will provide consistently superior returns.
Airlines are "essential to the functioning of ....the U.S." Would you like to buy and hold one? Or are they, too, market-timing equities?
Railroads were "essential" for the opening of the West, yet British investors lost nearly all their capital lending to and investing in them in the late 1800s.
Just because a sector is essential for something doesn't mean it's a worthwhile investment, when other alternatives are available.
In its totality, Randall Smith's piece displays, in one place, many errors of logic and biases which tend to characterize this type of investment journalism.
Proving to me, once again, why the financial sector's continuing insistence on sector-based analysis and investment provides such a helpful confusion to many investors. Meanwhile, other investors, like me, focus on firms of any sector which simply have prospects of providing consistently superior total returns now and in the near future.
Now that I think of it, the only two routinely-appearing Journal writers in the Money & Investing section which I find generally sound and interesting are Kelly Evans and Dennis Berman. Neither is confined to a single sector or topic.
Just like their actual kindred spirits in sell-side analysis or sector portfolio management, journalists who focus solely on either investing, or a sector, have a recurring problem. They must publish tantalizing pieces on a fixed schedule, and the pieces must at least appear to provide some fresh insight or value, regardless of whether, for sector-focused analysts and portfolio managers, it's just a bad time to be in that sector.
But this flies in the face of legendary Vanguard Group founder John Bogle's dictum,
'Don't just do something- stand there,' which captures his well-regarded and empirically-proven contention that passive index investing will provide most retail investors with comparatively better returns at lower risks for the long term.
However, in keeping with why I originally began this blog, I decided to read and dissect Smith's article to see what sort of sense it makes. Passages from his piece are in italics.
Bank stocks rocketed out of the financial crisis in 2009, helping to ignite a bull market that has lasted more than two years.
This sort of anthropomorphizing of "the market" is an old journalist's trick to get you to regard equities emotionally, and actually believe they possess some sort of animus of their own. They don't. It's also an attempt to portray what may be simple correlation as causation, which also takes much more work to prove.
But in the past year, they have lagged the broader U.S. market. While the Standard & Poor's 500-stock index has risen 15.6%, a widely watched measure of bank stocks, the KBW Bank Index, has fallen 10%.
Now, as the economy moves from recovery mode to full-fledged expansion, some market strategists and advisers say bank stocks should outperform once again.
Christ, is it me, or does Smith sound like the pitchmen on the frequently-appearing 'invest in gold' ads on cable business channels? Does it get more hackneyed than "some....strategists...say banks stocks should outperform once again?"
"As the economy improves, we're seeing capital-markets activity picking up, credit trends improving dramatically, problem loans and delinquencies falling, and loan demand picking up—all the classic signs of an early-stage recovery," says William Tanona, a bank-stock analyst at UBS AG.
Wow, I'm impressed with Tanona's insights. But, wait....he's a bank-stock analyst! At UBS. Which really means he's a bank-stock sales support publicist at UBS. If bank stocks become uninteresting, Tanona's going hungry. So I'm sure his remarks are always totally objective.
The case for bank stocks has three main prongs. First and foremost, banks look cheap. On average, bank stocks trade at just 0.9 times their book value per share, while their average for the seven years before the meltdown of 2008 was about two times, Mr. Tanona says.
While current valuations reflect investors' fears about new regulations and higher capital requirements, Mr. Tanona says multiples should rise "once asset quality normalizes and firms adjust for all the regulatory, legal and capital requirements."
Seriously, I had to stop laughing at this point before continuing my comments. First, we have the old 'they sure look cheap historically' argument. Meaning past is prologue. Except that all investment literature must state that prior performance is no guarantee of future performance, etc. Then that second paragraph, which essentially disguises the truth that nobody knows how Dodd-Frank will hobble these leviathans.
My longtime financial business colleague B, and I, both believe that the largest remaining US banks are now slow-moving utilities incapable of surprising growth for extended periods of time. They are essentially heavily-regulated, quasi-governmental finance arms which are so heavily insured and regulated as to be pointless as investments.
J.J. Schenkelberg, an investment adviser at CLS Investments LLC in Omaha, Neb., says her firm has put about $50 million of its $8 billion of client assets into an exchange-traded fund tracking the KBW Bank Index because the stocks are "quite attractively valued" based on their price-to-book ratio. "With these types of valuations, they are still overly punished" for the financial system's near-meltdown, she says.
I love it when sell-side, or even buy-side analysts stumping as sales people for their funds, use P/E ratios as causal, rather than consequential. My proprietary research found P/E ratios to be meaningless and unrelated statistically to consistently superior performing companies as measured by total return.
The prospect of rising interest rates in the next few years also bodes well for banks, say some strategists. In that scenario, banks' so-called net interest margin, a measure of the money banks earn by making loans, would increase, says analyst Chris Kotowski of Oppenheimer & Co. That's because, in a rising-rate environment, banks can usually raise the rate on their loans faster than they have to raise the rates on their deposits.
Some banks also say they can reinvest some of their assets more profitably once rates rise and regulators loosen controls over their reserves. Two of the largest banks by assets, Bank of America Corp. and J.P. Morgan Chase & Co., "are both positively positioned for rising rates," Mr. Tanona says. Others say Citigroup Inc. is, too.
At Wells Fargo & Co., redeploying just half of a $100 billion short-term cash trove could boost pretax profits by $880 million a year, analyst Chris Mutascio of Stifel Financial Corp. told Wells executives on a conference call last month. "I would not disagree with your math," replied Wells Chief Financial Officer Tim Sloan.
Other potential beneficiaries of rising rates include Bank of New York Mellon Corp., Charles Schwab Corp., and Federated Investors Inc., all of which would be able to recapture fees waived due to rock-bottom interest yields on money-market funds. "These companies automatically get a benefit when rates go up," says Frederick Cannon, director of research at Keefe, Bruyette & Woods.
As profits improve, banks are likely to boost their dividend payments, say analysts. Banks slashed their payments during the financial crisis to preserve capital. Now that the crisis has ebbed, regulators are allowing banks to return more cash to shareholders. Nineteen banks have raised their payouts so far in the second quarter, on top of the 39 that did so earlier in the year. Among those that did so after regulators approved their capital plans: J.P. Morgan Chase, Wells Fargo and U.S. Bancorp.
As a result, while the KBW Bank Stock Index currently yields about 0.9%, KBW's Mr. Cannon expects it to increase to 1.9% over the next year. He says that, in turn, should attract buyers to the stocks.
Not all banks are likely to boost their payments at the same time. Investors were surprised in March when one bank, BofA, saw its dividend plan rejected by regulators.
It's true, and I've written about this in prior posts, from my own knowledge as a Chase Manhattan officer years ago, that most people don't realize banks generally benefit from higher rate environments. But this is the sort of thing that the thousands of sell-side and buy-side bank analysts all spend their time estimating. So it's not on the order of, say, surprise growth at Apple or Priceline. And you'd be basically, according to Smith and his sources, buying now, to hope that, sometime after Helicopter Ben raises rates, or things go wrong in the US economy and nervous investors cause risk-free Treasury rates to soar as they shun debt auctions, these large banks will benefit from some liquid assets redeployed at higher rates.
Never mind that, in this economic environment, those higher rates might actually choke off economic growth and demand for loans. A trivial concern, I am sure.
The banking sector isn't a cakewalk these days. Some analysts warn that banks must adjust to a new lending reality that includes a retreat from the wild-west days of mortgages with zero down payments, no income documentation and other loose lending standards.
"It will take banks years to adapt" to an environment of mortgages with 20% down payments, says bank analyst Nancy Bush, a consultant with SNL Financial Corp.
I'm old enough to remember Nancy Bush as a young sell-side analyst, along with Tom Brown and Mike Mayo. She's seen a lot, and her cautionary words are appropriate. By the way, if it does take banks "years to adapt" to this new environment, doesn't that suggest that resulting profits could be lower and later than the (smirk) totally objective sell-side analysts contend?
One drag on banks' loan growth in recent years has been the need to shed legacy portfolios of toxic assets they either inherited from previous management, in the case of Citigroup, or acquired in acquisitions, in the case of J.P. Morgan Chase, Wells Fargo and BofA. One bank with a big slug of for-sale assets, Citigroup, is only about halfway through that runoff.
Ah, yes. Those pesky "legacy portfolios." That's what sell-side analysts and bank managements like to call the resulting toxic relics of their last big errors in judgement. But don't worry. Really. They've learned all their lessons and nothing remotely like those mistakes will ever happen again. Really. Everybody agrees- the sell-side analysts, the bank managements, the regulators caught napping lasting. Everyone! Even Randall Smith!
So, go ahead, invest already!
Still, Todd Green, chief investment officer at Alesco Advisors LLC in Rochester, N.Y., which owns $15 million of the same KBW bank fund, the SPDR KBW Bank ETF, expects bank stocks to rally as lenders reinstate or raise their dividends, mergers pick up and valuations bounce off their recent lows.
Bank stocks, he says, represent "an attractive opportunity in this market to buy high-quality companies at low prices, in an industry that's essential to the functioning of capitalism in the U.S."
Let's see....Todd Green's funds own a big chunk of bank ETFs. Todd would like you to believe, as he does, that banks will be hot. So Todd's investments, bought at lower values, will benefit from your stampede into, well, hopefully the very same ETFs that Todd's firm bought for its clients.
No lack of objectivity there, huh?
Mind you, these so-called "high quality" companies are the same ones which accepted government bailouts and heavy consequent oversight. Are these low prices? Why?
If the prices rise due to equity index rises, maybe the S&P500 is safer.
Then there's the real proposition that would likely infuriate John Bogle.
This entire article, and all the supportive material, argue for market timing. Pure and simple. But market timing is notoriously unreliable and largely the province, when successful, of seasoned professionals who also have the benefit of legal market intelligence that retail investors lack.
It's always curious to me that analysts expect people to buy and hold in hopes of some future gains, while they know that what investors want is gains now...and in the future. I know of no professional fund managers who believe that telling investors to just wait through poor or negative returns now for future better returns will retain their capital. Market timing propositions, which is what Smith's piece is, fly in the face of seeking consistently good investment performance.
Finally, Green engages in a bit of suspect logic. Banks may be "essential to the functioning of capitalism in the U.S.," but that does not mean they will provide consistently superior returns.
Airlines are "essential to the functioning of ....the U.S." Would you like to buy and hold one? Or are they, too, market-timing equities?
Railroads were "essential" for the opening of the West, yet British investors lost nearly all their capital lending to and investing in them in the late 1800s.
Just because a sector is essential for something doesn't mean it's a worthwhile investment, when other alternatives are available.
In its totality, Randall Smith's piece displays, in one place, many errors of logic and biases which tend to characterize this type of investment journalism.
Proving to me, once again, why the financial sector's continuing insistence on sector-based analysis and investment provides such a helpful confusion to many investors. Meanwhile, other investors, like me, focus on firms of any sector which simply have prospects of providing consistently superior total returns now and in the near future.
Thursday, April 21, 2011
Regarding Intel's Quarterly Results & Investment Strategy
Intel's earnings report after the market's close on Tuesday evidently surprised analysts. As I write this before Wednesday's market open, the firm's equity price has risen some 7% in after-hours trading.
Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.
Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.
The first chart compares Intel's equity price to the S&P500 Index's for the past five years. For all the risk you'd assume in holding the single issue, Intel, you would have had a return virtually identical to that of the broadly-diversified index.
But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.
So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.
This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.
If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.
Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth stock....it's not. A quarter here, a quarter there...does not a growth issue make.
Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.
No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.
But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.
Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.
Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.
But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.
So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.
This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.
If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.
Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth stock....it's not. A quarter here, a quarter there...does not a growth issue make.
Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.
No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.
But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.
Tuesday, September 29, 2009
3Q Profit Expectations & The Economy
Yesterday's Wall Street Journal's Money & Investing section featured a lead article concerning third quarter performances of US companies, entitled "Profits Poised to Surprise Again."
To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.
First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.
Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.
Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.
Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.
Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.
All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.
What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.
It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?
Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.
To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.
First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.
Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.
Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.
Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.
Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.
All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.
What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.
It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?
Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.
Thursday, June 04, 2009
The WSJ's James Stewart's Wrong-Headed View of GM & The Automotive Sector
I've written prior posts about the Wall Street Journal's gullible personal finance columnist, James Stewart's dubious advice and opinions, such as this one. Ordinarily, Stewart confines his lunacy to investment topics.
Earlier this week, however, Mr. Stewart treated Journal readers to his lack of understanding of industry structure and business strategy, as well.
To wit, he wrote a column about why GM will rise again to be a premier auto producer. He began by writing,
"The myriad causes of its demise have been thoroughly chronicled, but to my mind one stands out: The custodians of GM simply gave up trying to build the best cars in the world. To accommodate a host of competing interests, from shareholders and bondholders to labor, they repeatedly compromised on excellence. Once sacrificed, that reputation has proved impossible to recapture.
GM has made strides in quality after decades of churning out troubled cars. Cadillac, in particular, has regained a little of its lost luster. But can anyone say GM builds the best cars in any category? Can it rival a Toyota Prius or Honda Insight for fuel efficiency and reliability? A Lexus, BMW or Infiniti for luxury and performance?
In other words, the new, government-controlled GM likely to emerge from bankruptcy faces an uphill battle in a highly competitive global market. That doesn't mean the effort is doomed. Indeed, it seems to me that the sharper the break with the past, the better.
I've been encouraged by President Obama's remarks that even though the government will own a majority stake, the new GM will be run by auto makers, and the government won't interfere to pursue policy goals that may be inconsistent with shareholder interests."
Let's stop here briefly to parse Stewart's confused logic. After admitting that GM's management failed in many areas, including product design, he then expresses a belief that the 'new' GM, staffed by the same losers, will miraculously "break with the past."
Yeah, right!
Then he compounds his confused reasoning by ignoring the evidence of the past few months and declaring that the government will, of course, keep its hands off the operation of GM. Even yesterday's Congressional grilling of auto execs about dealership closures demonstrates this is a preposterous assumption.
So you have two giant institutions, GM and the federal government, neither with a history of successfully operating profitably by serving consumers, entangled in the management of the failed car company.
Stewart continues by contending,
"I've argued before that government should act as private-equity investors in distressed assets, with the exclusive goal of turning the company around and exiting with a big profit to taxpayers in a finite period of roughly seven to 10 years. To my mind, this is the only way to approach government ownership in any industry that is consistent, fair, and recognizes a fiduciary duty to the owners, who happen to be the taxpayers. This won't be easy, but I think President Obama and his Treasury-led auto task force may be tough enough to pull it off."
Conrail was created with the expectation of becoming independent in three years. That turned out to be hopelessly optimistic. The so-called privatization of the Post Office didn't go so well, either. Add to this the contrasting public statements by the administration and GM's CEO as to how long the government will have to wait for its investments/loans to be repaid, with interest, and you have total confusion and no credibility that GM will ever be weaned from public funding.
On the basis of these suspect premises, Stewart concludes,
"Can the U.S. field a world-class auto industry? I don' t see why not. Cars aren't a commodity like steel, an industry largely lost to foreign competitors. They are complex, highly sophisticated, individualized machines that despite over a century of progress still have room for improvements in fuel efficiency, performance and safety. What U.S. companies need to recapture is an unrelenting commitment to quality. I hope the GM bankruptcy accelerates the day when a father can again hand the keys to a Cadillac to his 16-year-old with the same pride my father felt when he gave them to me."
Actually, he's completely wrong in his understanding of auto sector structure. To state that "cars aren't a commodity like steel," is technically correct in the comparison, but incorrect that they are not, still, a commodity. Cars are may be "complex, highly sophisticated" machines, but they aren't "individualized" in the manner Stewart believes. Much, if not nearly all of the sophistication now comes from suppliers like Bosch (anti-lock brakes). Research and development into proprietary power systems is so expensive that it has driven the sector toward a classic 'Big 3' structure, in which only the largest few global producers will likely achieve necessary economies of scale to profitably innovate in the years to come.
Thus, the barriers to entry, a key aspect of industry structure, have become so low that China has had over 50 new entrants, including municipalities! Kia, from Korea, has been around for nearly a decade already. Anyone with a large bankroll could, in theory, and has, simply shopped for components from vendors, outsourced engines, if necessary, and assembled the guts beneath a unique metal skin.
Fact is, auto 'manufacture' is, and has been, for decades, more 'assembly' than manufacture. Thus, fairly low-skilled workers in other countries can capably bolt together a modern car more productively than over-priced US union workers. That's a big reason why GM failed. And will remain failed.
Stewart's piece merely showcases his lack of understanding of even a basic large industry sector such as auto production. In fact, his contentions and conclusions are almost diametrically opposed to those of another Journal writer, Holman Jenkins, Jr.
One wonders, if he's this clueless about GM, how he can be trusted to advise anyone about any investment that requires understanding a business sector. And, by the way, why the Journal still wastes ink on his column.
Earlier this week, however, Mr. Stewart treated Journal readers to his lack of understanding of industry structure and business strategy, as well.
To wit, he wrote a column about why GM will rise again to be a premier auto producer. He began by writing,
"The myriad causes of its demise have been thoroughly chronicled, but to my mind one stands out: The custodians of GM simply gave up trying to build the best cars in the world. To accommodate a host of competing interests, from shareholders and bondholders to labor, they repeatedly compromised on excellence. Once sacrificed, that reputation has proved impossible to recapture.
GM has made strides in quality after decades of churning out troubled cars. Cadillac, in particular, has regained a little of its lost luster. But can anyone say GM builds the best cars in any category? Can it rival a Toyota Prius or Honda Insight for fuel efficiency and reliability? A Lexus, BMW or Infiniti for luxury and performance?
In other words, the new, government-controlled GM likely to emerge from bankruptcy faces an uphill battle in a highly competitive global market. That doesn't mean the effort is doomed. Indeed, it seems to me that the sharper the break with the past, the better.
I've been encouraged by President Obama's remarks that even though the government will own a majority stake, the new GM will be run by auto makers, and the government won't interfere to pursue policy goals that may be inconsistent with shareholder interests."
Let's stop here briefly to parse Stewart's confused logic. After admitting that GM's management failed in many areas, including product design, he then expresses a belief that the 'new' GM, staffed by the same losers, will miraculously "break with the past."
Yeah, right!
Then he compounds his confused reasoning by ignoring the evidence of the past few months and declaring that the government will, of course, keep its hands off the operation of GM. Even yesterday's Congressional grilling of auto execs about dealership closures demonstrates this is a preposterous assumption.
So you have two giant institutions, GM and the federal government, neither with a history of successfully operating profitably by serving consumers, entangled in the management of the failed car company.
Stewart continues by contending,
"I've argued before that government should act as private-equity investors in distressed assets, with the exclusive goal of turning the company around and exiting with a big profit to taxpayers in a finite period of roughly seven to 10 years. To my mind, this is the only way to approach government ownership in any industry that is consistent, fair, and recognizes a fiduciary duty to the owners, who happen to be the taxpayers. This won't be easy, but I think President Obama and his Treasury-led auto task force may be tough enough to pull it off."
Conrail was created with the expectation of becoming independent in three years. That turned out to be hopelessly optimistic. The so-called privatization of the Post Office didn't go so well, either. Add to this the contrasting public statements by the administration and GM's CEO as to how long the government will have to wait for its investments/loans to be repaid, with interest, and you have total confusion and no credibility that GM will ever be weaned from public funding.
On the basis of these suspect premises, Stewart concludes,
"Can the U.S. field a world-class auto industry? I don' t see why not. Cars aren't a commodity like steel, an industry largely lost to foreign competitors. They are complex, highly sophisticated, individualized machines that despite over a century of progress still have room for improvements in fuel efficiency, performance and safety. What U.S. companies need to recapture is an unrelenting commitment to quality. I hope the GM bankruptcy accelerates the day when a father can again hand the keys to a Cadillac to his 16-year-old with the same pride my father felt when he gave them to me."
Actually, he's completely wrong in his understanding of auto sector structure. To state that "cars aren't a commodity like steel," is technically correct in the comparison, but incorrect that they are not, still, a commodity.
Thus, the barriers to entry, a key aspect of industry structure, have become so low that China has had over 50 new entrants, including municipalities! Kia, from Korea, has been around for nearly a decade already. Anyone with a large bankroll could, in theory, and has, simply shopped for components from vendors, outsourced engines, if necessary, and assembled the guts beneath a unique metal skin.
Fact is, auto 'manufacture' is, and has been, for decades, more 'assembly' than manufacture. Thus, fairly low-skilled workers in other countries can capably bolt together a modern car more productively than over-priced US union workers. That's a big reason why GM failed. And will remain failed.
Stewart's piece merely showcases his lack of understanding of even a basic large industry sector such as auto production. In fact, his contentions and conclusions are almost diametrically opposed to those of another Journal writer, Holman Jenkins, Jr.
One wonders, if he's this clueless about GM, how he can be trusted to advise anyone about any investment that requires understanding a business sector. And, by the way, why the Journal still wastes ink on his column.
Monday, September 08, 2008
John Mack's Old & Tired Ideas For 'Refocusing" Morgan Stanley
The weekend edition of the Wall Street Journal carried an article describing John Mack's efforts to 'refocus' Morgan Stanley.
The lead sentence in the piece tells you the trouble Mack is courting,
"For two weeks in July, Morgan Stanley Chief Executive John Mack moved into an office near the research analysts who work at the Wall Street firm's headquarters in New York's Times Square. He had two goals: boost morale in a unit hit hard by layoffs and figure out how to squeeze more value out of stock research."
John, do you recall a guy named Elliot Spitzer? Do you remember what he charged many Wall Street firms with doing? Including your own, Morgan Stanley, regarding Mary Meeker?
As I recall, Spitzer reached a major, sector-changing settlement with your firm, and others, for ....squeezing more value out of stock research!
Mostly by improperly attaching it to trading and investment banking, so access to star analysts, and their involvement in boosting firms underwritten by their own firms, shifted their work from independent, objective research, to mere marketing on behalf of clients and trading desks.
A friend of mine, formerly a senior communications systems management at Lehman, now at a major tech firm, confirmed this for me last summer. He regaled me with stories of 'research analysts' getting in on the pitch to prospective underwriting clients on how they would support the new client via opinions to institutional clients and their own trading desks.
This is the sort of thing that the storied settlement was supposed to change.
Now, John Mack is reportedly,
"Since having dinner with research division leaders and informal chats with analysts as part of his two-week immersion, Mr. Mack has been talking with lieutenants about what should be changed in research. One challenge: quantifying the value generated by good ideas used by both the firm and its clients. The topic has come up several times at recent weekly management-committee meetings."
First, isn't that the holy grail of Wall Street? And has been since time immemorial? Please tell me, John, that you don't really think this is new ground you are plowing.
"Quantifying the value...." of research is the age old quest of brokerages trying to figure out what those expensive eggheads actually do to make money for the firm.
And, since the modern brokerage has three major businesses- institutional sales/trading, proprietary trading and underwriting- the analyst must be adding value to one or more of these, if s/he adding value at all.
The first and third businesses are exactly where Spitzer's hunt focused- improper use of analysts to win underwriting and then lever those products into institutional trading clients.
Using analysts to improve proprietary trading is, of course, an obvious path. But if this were simple and effective, wouldn't it already have been done? Then, again, the really good analysts, eventually, become money managers. So maybe that's not as simple as it seems. And it puts great pressure on analysts to produce consistently and well. Maybe that, too, doesn't work so well in practice as in theory.
It just strikes me, from the Journal article, that none of Mack's alleged new ideas is actually new at all. And if they are known to work, wouldn't the article note that, too?As the nearby five year price chart for Morgan Stanley and the S&P500 Index indicates, it's been a terrible 18 months or so for Mack and his battered shareholders.
It seems to be another stumble of John Mack's on the long journey through the desert of bad performance on which he has led Morgan Stanley these past few years.
Wednesday, July 16, 2008
Irresponsible Investment Advice On CNBC
A few days ago, I saw an unbelievable segment on CNBC concerning investing in financial service company equities.
CNBC on-air personality Dennis Kneale was discussing how badly the valuations of commercial and investment banks have slipped, thanks to their owning untold numbers and types of 'mark to market' securities.
These, Kneale remarked, make the equities of these firms equivalent to 'blind pools.'
That's a pretty harsh comment, but, I think, absolutely true. It certainly would prevent me from owning any of these equities.
My large-cap equity selection process, thankfully, measures and evaluates equities based on factors which basically rule out financial equities at this time.
The amazing part of the CNBC segment was that, following Kneale's comment, a guest bank analyst repeated her assertion that now was the time to look for bargains by bottom fishing the sector.
Her only cautionary remark was something like 'you have to evaluate each one individually, and be careful!'
I suppose in a roomful of professional analysts and investors, her words might be appropriate. But to retail viewers/investors, I think it bordered on, or was, completely irresponsible.
I'm sure you can find, right now, a lot of institutional investors who wrongly believed they could safely hold financial service equities, other than Goldman Sachs, with impunity. And even Goldman has suffered.
How, then, are garden-variety occasional, non-professional investors supposed to decipher and correctly guess at how much 'mark to market' junk is on the balance sheet of each and every financial service firm, and how much more it needs to be discounted?
Simply unbelievable that CNBC actually airs nonsense like this.
I'll have more to write about the financial service mortgage-related mess later this week, as well as my concluding 'from the road' piece about whether we are actually in a broad-based recession.
CNBC on-air personality Dennis Kneale was discussing how badly the valuations of commercial and investment banks have slipped, thanks to their owning untold numbers and types of 'mark to market' securities.
These, Kneale remarked, make the equities of these firms equivalent to 'blind pools.'
That's a pretty harsh comment, but, I think, absolutely true. It certainly would prevent me from owning any of these equities.
My large-cap equity selection process, thankfully, measures and evaluates equities based on factors which basically rule out financial equities at this time.
The amazing part of the CNBC segment was that, following Kneale's comment, a guest bank analyst repeated her assertion that now was the time to look for bargains by bottom fishing the sector.
Her only cautionary remark was something like 'you have to evaluate each one individually, and be careful!'
I suppose in a roomful of professional analysts and investors, her words might be appropriate. But to retail viewers/investors, I think it bordered on, or was, completely irresponsible.
I'm sure you can find, right now, a lot of institutional investors who wrongly believed they could safely hold financial service equities, other than Goldman Sachs, with impunity. And even Goldman has suffered.
How, then, are garden-variety occasional, non-professional investors supposed to decipher and correctly guess at how much 'mark to market' junk is on the balance sheet of each and every financial service firm, and how much more it needs to be discounted?
Simply unbelievable that CNBC actually airs nonsense like this.
I'll have more to write about the financial service mortgage-related mess later this week, as well as my concluding 'from the road' piece about whether we are actually in a broad-based recession.
Tuesday, January 15, 2008
Wither Citigroup Now? Pandit's Pronouncement
It's just after noon on Tuesday, January 15th, 2008. Citigroup CEO Vikram Pandit has concluded his first earnings announcement a little while ago, and the markets are not pleased.
The write-offs are huge. Losses are near $10B. The dividend has finally been cut nearly in half. Apparently, it wasn't enough.
Seen on the left, my first Yahoo-sourced chart indicates that the company's stock price has gapped significantly lower today, back down to or below 27, from its recent 5-day high of 29.According to some of the pundits talking on CNBC this afternoon, including one fairly prominent fund manager, Vince Farrell, Pandit blew his chance to make a good first impression. There was no talk of significant, immediate job cuts.
Let's take a longer look at Citi's stock. Here's a chart of the S&P and Citi's stock price for the last three months. The latter has been pretty much in free-fall for that entire time. It had a few local minima, where the price moved up by 5 or 10 percentage points over a few weeks. But the trend has been steadily downward.
Over the past year, the picture is similar. The price of Citi's stock has declined over 40%. Even before the summer credit market debacle, Citigroup's stock had been fading, relative to the S&P.
Finally, we have a Yahoo-sourced chart of the S&P and Citigroup for the past five years.In this view, we see that for largely the entire period, except for a brief few months in mid-2003, the bank's stock has performed, at best, like a market-tracking stock, and, since January of 2005, three years ago, significantly worse.
Taking a look at all of these views- multi-day, multi-month, 1 & 5 years- it's hard to argue that Citigroup has been a desirable investment, or well-managed, for the past half-decade.
So, does Pandit's poor opening performance as CEO today matter?
As I jokingly wrote in this spoofish post last month, Pandit's already won. He's made at least tens of millions by selling his mediocre hedge fund to Citi last summer.
So, in all honesty, I think the answer is, "no," it doesn't matter. Nothing has changed at Citigroup.
And, according to some pundits speaking about the situation today on CNBC, it could be years before the nation's largest bank regains any semblance of traction in terms of operating performance and total return performance.
What really shocks me, though, is Punk Ziegel bank analyst Dick Bove's continuing 'buy' position on Citigroup for the past two years. At least I think his eternal optimism on the bank extends that far back. I know he was touting it heavily last spring, claiming that its best days were just around the corner.
Even this morning, he was shilling for the crippled bank on CNBC, issuing yet more strongly-worded statements of hope and support for Pandit's financial Pig.
You have to wonder what in the world would possess a veteran analyst like Bove to hew to a single view of such a mediocre, troubled bank for so long.
To me, reviewing the performance of Citigroup's stock over such a long timeframe, and comparing that to its erratic and troubled operational performance during the same period, I would have to agree with those who advise steering clear of this financial utility for the forseeable future. Aside from continuing to enrich Vik Pandit, and impoverish the poor shareholders whose original positions are being so rapidly diluted by new capital-raising efforts, I can't imagine anyone who would even consider owning this company's shares.
Monday, January 07, 2008
Cable vs. Telephony Valuations
Friday's Wall Street Journal carried a piece by its minority-owned analyst's shop, breakingviews.com. This particular piece involved the assessment of market valuations of cable companies versus those of ATT and Verizon.
Specifically, Robert Cyran and Lauren Silva argued that,
"The phone companies furthest along in their rollouts are pummeling cable groups. Shares of Verizon and AT&T both rose more than 15% in 2007, while shares in Comcast and Charter Communications have fallen 35% and 62%, respectively. This trend isn't over.
Cablevision and Comcast increased their capital-spending plans last quarter. However, the average cable company has a prodigious amount of debt. In the short term, it could be difficult for them to take on much more in order to build better networks. Despite all this, the average cable stock trades at a 30% premium to the big telephone companies, based on estimated 2008 earnings before interest, taxes, depreciation and amortization. This doesn't look right. Cable companies may be overvalued or phone companies undervalued -- either way they should converge over time. Playing that trend again in 2008 is likely to reward investors."
Whenever I read people quibbling or arguing over valuations, a red flag goes up. In this case, note the use of the word 'estimated 2008 earnings.'
Whose estimates?
Essentially, Cyran and Silva complain that cable stocks are probably 30% overvalued (from their prose earlier in the piece), but that, either way, they should converge to a similar multiple as that of ATT and Verizon. Oh, and, by the way, according to the article's numbers, cable is still 'overvalued,' despite a 2007 decline of as much as 60% or 30% in value among selected cable equities.
Maybe I'm wrong, but didn't I read articles in the Journal over the last year concerning Verizon's difficulties in stringing fiber through every town and hamlet? That local regulatory fiefdoms were holding it up for special deals and payments? That it's not the cost or technical aspect of running fiber, per se, that dogs Verizon, but, to put it bluntly, the extortion money the company must pay to every little 'burb that it wants to serve with fiber-optic.
Perhaps, as the piece alleges,
"Installing fiber may be costly, but it enables the phone companies to leapfrog their cable rivals. While expensive to install, fiber is cheaper to operate because many repairs can be done off-site. Verizon claims a saving of around $900 a customer a year. More important, a fiber connection to the home offers a faster Internet service than the cable companies serve up."
But if the local regulatory/payoff issue hasn't been resolved for the long term, I think that could go a long way toward explaining the valuation differences. Cable has been a community staple for decades. It doesn't have to negotiate for access anymore, if it ever did. Maybe that's why the article stated,
"Verizon and AT&T both offer the so-called triple play: phone, television and Internet service. While the big cable guys have about 10 million customers for their phone service, the phone companies are just getting started in video. AT&T has around 250,000 customers and Verizon about one million."
Clearly, the phone companies have a long way to go to reach the same numbers in high-speed access as cable currently has in telephone. Even my father recently switched his telephone to his cable provider.
Additionally, as I recall, DSL is more susceptible to local traffic congestion, by virtue of its loop technology, than is high-speed cable.
It just seems to me that Cyran and Silva paint an incomplete picture of the various bases of competition and consumer choice for high-speed access. The fundamental regulatory and technical aspects of cable and telephony are still quite different.
Might not that, alone, account for valuation differences?
Specifically, Robert Cyran and Lauren Silva argued that,
"The phone companies furthest along in their rollouts are pummeling cable groups. Shares of Verizon and AT&T both rose more than 15% in 2007, while shares in Comcast and Charter Communications have fallen 35% and 62%, respectively. This trend isn't over.
Cablevision and Comcast increased their capital-spending plans last quarter. However, the average cable company has a prodigious amount of debt. In the short term, it could be difficult for them to take on much more in order to build better networks. Despite all this, the average cable stock trades at a 30% premium to the big telephone companies, based on estimated 2008 earnings before interest, taxes, depreciation and amortization. This doesn't look right. Cable companies may be overvalued or phone companies undervalued -- either way they should converge over time. Playing that trend again in 2008 is likely to reward investors."
Whenever I read people quibbling or arguing over valuations, a red flag goes up. In this case, note the use of the word 'estimated 2008 earnings.'
Whose estimates?
Essentially, Cyran and Silva complain that cable stocks are probably 30% overvalued (from their prose earlier in the piece), but that, either way, they should converge to a similar multiple as that of ATT and Verizon. Oh, and, by the way, according to the article's numbers, cable is still 'overvalued,' despite a 2007 decline of as much as 60% or 30% in value among selected cable equities.
Maybe I'm wrong, but didn't I read articles in the Journal over the last year concerning Verizon's difficulties in stringing fiber through every town and hamlet? That local regulatory fiefdoms were holding it up for special deals and payments? That it's not the cost or technical aspect of running fiber, per se, that dogs Verizon, but, to put it bluntly, the extortion money the company must pay to every little 'burb that it wants to serve with fiber-optic.
Perhaps, as the piece alleges,
"Installing fiber may be costly, but it enables the phone companies to leapfrog their cable rivals. While expensive to install, fiber is cheaper to operate because many repairs can be done off-site. Verizon claims a saving of around $900 a customer a year. More important, a fiber connection to the home offers a faster Internet service than the cable companies serve up."
But if the local regulatory/payoff issue hasn't been resolved for the long term, I think that could go a long way toward explaining the valuation differences. Cable has been a community staple for decades. It doesn't have to negotiate for access anymore, if it ever did. Maybe that's why the article stated,
"Verizon and AT&T both offer the so-called triple play: phone, television and Internet service. While the big cable guys have about 10 million customers for their phone service, the phone companies are just getting started in video. AT&T has around 250,000 customers and Verizon about one million."
Clearly, the phone companies have a long way to go to reach the same numbers in high-speed access as cable currently has in telephone. Even my father recently switched his telephone to his cable provider.
Additionally, as I recall, DSL is more susceptible to local traffic congestion, by virtue of its loop technology, than is high-speed cable.
It just seems to me that Cyran and Silva paint an incomplete picture of the various bases of competition and consumer choice for high-speed access. The fundamental regulatory and technical aspects of cable and telephony are still quite different.
Might not that, alone, account for valuation differences?
Tuesday, December 18, 2007
On Wall Street Analysts' Forecasting
Yesterday's post on Bob Doll's CNBC equivocation performance pushed this post back to today. Appearing in the 'Ahead of the Tape' column in the Wall Street Journal's Money & Investing section was a piece entitled "Analysts Botch Profit Forecasts On Home Turf."
In this piece, Journal staffer Scott Patterson observes that Wall Street's analyst corps seemed particularly blind to their own sector's weakness this year. He begins with noting that in July, analysts forecast an average third-quarter earnings gain of 9% for the sector, when, in reality, it came in at -27%. At that same time, these analysts projected the sector's fourth-quarter earnings as increasing 10%. Now, those same analysts expect a -45% earnings change for the year-ending period.
Patterson spotlights Merrill's Guy Moszkowski as retaining a buy rating on various large brokers/investment banks, including Bear Stearns, through late August.
Mike Mayo, now at Deutsche Bank, recommended selling various second-tier banks, but got Merrill wrong and maintained a buy rating through early November.
Finally, longtime commercial bank analyst and Citigroup apologist Dick Bove is regarded by Patterson as "better than most." But while he
"started getting bearish on banks and brokerages in late 2006, though he waited until July to downgrade the broader sector. He is the only analyst with a "sell" rating on Bear Stearns, Morgan Stanley and Lehman, according to Zacks Investment Research."
Bove is a frequent guest analyst on CNBC, and happens to have been a personal friend of my business partner when Bove still lived up north, near New York City. Bove has, in an odd omission by Patterson, been steadfastly bullish on Citigroup throughout the year. Back in the spring, he held forth on how Citigroup would be forging ahead with earnings growth. Even now, Bove won't throw in the towel.
If this is 'better than most,' it's a sad commentary, indeed, on sell side analysts rating their own sector's members, isn't it?
Patterson observes that Besty Graseck of Morgan Stanley broke ranks to make Citigroup her top short stock recommendation for 2008.
Of course, it's worth considering this in light of the recent year's performance of Citigroup stock. Even with its dividend added back, the stock's price is down around 40% this year, while the S&P is just barely positive.So you have to ask yourself, can Citigroup's stock price really fall, again, in 2008, more than any other large cap?
Don't you think most of the surprise is gone now? I mean, a near-50% haircut is pretty serious. So Graseck must be looking for something like another 20% drop in the firm's share price.
At that point, I'd think we are talking a Fed-brokered acquisition by Citi, or its pieces, to avoid truly serious financial system damage.
So perhaps Graseck's call is more for spite, directed Vikram Pandit's meteoric rise, noted in this posts, here and here, from cashiered Morgan Stanley employee to Citi CEO in only two years.
In any event, Patterson's article goes a long way toward explaining why I pay absolutely no attention to analysts' calls on stock price behavior. While an analyst may know a lot about the internal mechanics of their subject companies, this article points up their long, inherent weakness in forecasting things like earnings and stock prices.
Years ago, a one-time partner in my equity portfolio strategy business sent me an article which compared analysts' earnings projections deviations from actual earnings, over time. A decade ago, they were already becoming progressively worse each year. I guess the trend has continued.
Maybe this is a fine example of 'lizard brain' behavior that is the theme of Terry Burnham's excellent book, "Mean Markets and Lizard Brains." Perhaps even institutional investment managers seek safety in the advice of highly paid analysts, even though their demonstrable track record, as a group, are so deplorably bad.
Wednesday, June 06, 2007
Prudential's Withdrawal From Equity Research
Today's early morning program on CNBC provided breaking coverage of the announcement of Prudential's dissolution of its equity group. According to the story, some 400 people are being dismissed, including institutional equity trading, analysis, and, one supposes, underwriting.
As Becky Quick and Joe Kernen discussed the new development, nobody seemed to acknowledge the elephant in the room on this issue. Rather, they were musing about whether this means most research shops are not able to pay their way. One would think this was a foregone conclusion after the heavy use of 'research' to market underwriting and trading during the technology bubble of the late 1990s and early 2000s.
Conventional institutional equity trading of highly liquid, large- or mid-cap issues is simply unprofitable. Prudential is an also-ran player, behind the major investment and commercial banks. What hope could a second-rate securities unit, at an insurance firm, have to add unique value for institutional investors in the area of vanilla equities?
Personally, I'm happy to read of this development. It is yet another good example of Schumpeterian dynamics at work, weeding out the mediocre players in mature product/markets.
It's unlikely that anyone will notice, six months from now, that Pru's equity operation is even missing. The next two or three smallest shops could also shut down, with similar lack of impact on the markets. With so much free information available online now, why is anyone surprised at the shrinking market for providing conventional research and related equity services to institutional investors?
Of more value in today's market is the shifting volumes of transactions in specific issues, and sources of upward or downward pressure on demand for them among fund managers. That is a far cry from the old-style, conventional paper-based equity research provided by firms like Pru.
As Becky Quick and Joe Kernen discussed the new development, nobody seemed to acknowledge the elephant in the room on this issue. Rather, they were musing about whether this means most research shops are not able to pay their way. One would think this was a foregone conclusion after the heavy use of 'research' to market underwriting and trading during the technology bubble of the late 1990s and early 2000s.
Conventional institutional equity trading of highly liquid, large- or mid-cap issues is simply unprofitable. Prudential is an also-ran player, behind the major investment and commercial banks. What hope could a second-rate securities unit, at an insurance firm, have to add unique value for institutional investors in the area of vanilla equities?
Personally, I'm happy to read of this development. It is yet another good example of Schumpeterian dynamics at work, weeding out the mediocre players in mature product/markets.
It's unlikely that anyone will notice, six months from now, that Pru's equity operation is even missing. The next two or three smallest shops could also shut down, with similar lack of impact on the markets. With so much free information available online now, why is anyone surprised at the shrinking market for providing conventional research and related equity services to institutional investors?
Of more value in today's market is the shifting volumes of transactions in specific issues, and sources of upward or downward pressure on demand for them among fund managers. That is a far cry from the old-style, conventional paper-based equity research provided by firms like Pru.
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