Archive for August, 2012
Pretzels, Bratwurst, Beer, and Markets
No, I was not lazy, sick, or kidnapped, but rather I was on vacation and hence I have been tardy on my most recent blog posting. These vacation things are relatively rare in the Slome household, therefore the family decided to take a larger than normal trip. Where did we go? Well, with all the talk about Europe’s financial woes, we decided to go to the financial nerve center of the crisis…Germany! Truth be told, the fact that my mother was born there and I have a ton of relatives there may also have something to do with the selection. Now that I have safely returned, I’m glad to report that the world has not ended yet in Europe…or at least not in the comparatively stronger region of Deutschland.
Here is a shortened collage of my trip highlights:
King Ludwig II’s Linderhof Castle in Southern Germany.
Summer home to Bavaria’s former kings in Munich (Nymphenburg Palace)
Spectacular view of the Neckar River.
Neuschwanstein Castle (a.k.a., the Disneyland castle).
Picturesque scene of Forggensee Lake as we hike up to the Neuschwanstein Castle.
Picture from the interior courtyard of Heidelberg Castle.
Town of Rudesheim perspective from the Rhine River.
Who said there was no surfing in Germany?
Munich’s famous Glockenspiel depicting the marriage between local Duke Wilhelm V with Renata of Lorraine.
“Doe a deer, a female deer, ray, a drop of golden sun.” Leopoldskron Palace as seen in The Sound of Music (Salzburg Austria).
Max-Joseph Platz right next to the famous Munich Nationaltheater (opera house).
Hofbrauhaus…enough said.
The choice of my trip timing seemed fortuitous, since volume trickled to a crawl and there was not a tremendous amount of news-flow. How do I know? Although I traveled across the pond, my electronic phone, tablet, and computer leashes did not fully untether themselves from my control. With the presidential election cycle swinging into full gear, coupled with key announcements coming out of Frankfurt and Brussels, nobody should be surprised to see some more volatility. It’s time to detoxify from all the pretzels, bratwurst, and beer and more forcefully reengage in the financial markets.
Dollars and cents are lost every day, but the memories, experiences, and relationships from this trip will never be lost.
Auf Wiedersehen Deutschland!
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in DIS or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
The Art of the Conference Call
My heart is beating, my palms are sweaty, and I feel like I’m about to hurl. No, I don’t have the flu and I am not about to go sky diving, but rather my top holding is about to report its quarterly financial results. Fifteen minutes after the market close, the headline numbers are due. Company XYZ has just reported EPS results of $.96, a penny above Wall Street expectations. The outcome of the pending 60 minute conference call could have major ramifications, not only to my pocketbook, but also to millions of investors, including mine.
After printing out the fresh press release, hot-off-the-press, the challenge now becomes determining what to do with this mountain of newly available data at my fingertips?
Here are some important factors to consider as you scan through reams of press release data and prep for the next 60 minutes of joy:
Get the Basics: Most importantly, once your figure out what reported revenue and EPS results are relative to consensus, investors must determine whether the numbers are GAAP (Generally Accepted Accounting Principles) or Non-GAAP. Surprisingly to some, Non-GAAP results are preferred because these numbers are generally closer to “cash reality”.
What’s Guidance? The majority of companies reporting their quarterly results will provide investors an outlook of their financial expectations for the following quarter – and sometimes for the full year. This commentary is often more important to the immediate stock price compared to the just-reported actual results.
Bust Out the Red Bull: Now that we have the basics and the conference call is beginning, it’s time to break out the 6-pack of Red Bull. If company XYZ is like any of the other 98% of companies, investors will have the pleasure of listening to 30 minutes of monotonous press release reading. This is a smoke and mirrors approach for management to avoid the upcoming firing line of tough questions.
Numerical Basics: Now is the time to put your multi-tasking skills to the test. First, as management reads the press release in a monotone voice (usually verbatim or to a script), you can gather some of the important financial basics. Cash is king, so the first place I migrate to find the cash generating power of a company (or lack thereof) is the Cash Flow Statement. The crucial aspect is determining how much discretionary cash is available to the company after accounting for maintenance capital expenditures – this cash power can be used for dividends, share buybacks, and acquisitions. Next on the priority totem pole is the income statement, where we can check out the trends in sales growth, profit margins, and company specific metrics, such as same store sails in the retail industry or BOE in the energy industry (Barrels of Oil Equivalent). Strong profitability is great, but if the sales, margins, cash flows, and/or company metrics are moving in the wrong direction, then look out below – the stock may be on the verge of cratering. For reference, just take a peek at Zynga [ZNGA], Netflix [NFLX], Facebook [FB], and Research in Motion [RIMM] for proof.
Digesting Q&A: The questions and answers portion of the conference call is the meat and potatoes of the earnings release meal. This is the portion of the call in which management’s feet are held up to the fire with some critical questions. There are plenty of relevant and reasonable questions, but there is always at least one analyst who asks a 10-part question with endless follow-ups, going into the most obscure facets of the company, which will have no bearing on the stock price. On manzy occasions, the analysts ask the questions are more concerned about listening to the tones of their voice than they are interested in finding critical answers to strategic and operational corporate issues. Nonetheless, in most cases, this segment can be the most valuable part of the conference call.
Hodge Podge & Intangibles: After following the previous steps, the scattered puzzle will begin to take shape. But there are still are some pieces to put in place, in order to create a clearer picture. For example, market share is an important feature – triangulating share gains and losses via revenue trends and industry data can help determine who is winning and losing in the marketplace. The institution of price increases or cuts is another data point that can provide insights into the level of cut-throat competition. And let´s not forget aquisitions, these corporate marriages can either be a sign of dominant strength or a sign of weak desperation.
Putting the previously discussed elegant tools to use will help you become a better stock artist, but to truly master the art of the conference call one has to repeatedly practice these steps and add your personal list of analytical intangibles. Then, you will have a profitable piece of art.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and NFLX, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Equity Quicksand or Bond Cliff?
The markets are rigged, the Knight Capital Group (KCG) robots are going wild, and the cheating bankers are manipulating Libor. I guess you might as well pack it in…right? Well, maybe not. While mayhem continues, equity markets stubbornly grind higher. As we stand here today, the S&P 500 is up approximately +12% in 2012 and the NASDAQ market index has gained about +16%? Not bad when you consider 15 countries are offering negative yields on their bonds…that’s right, investors are paying to lose money by holding pieces of paper until maturity. As crazy as buying technology companies in the late 1990s for 100x’s or 200x’s earnings sounds today, just think how absurd negative yields will sound a decade from now? For heaven’s sake, buying a gun and stuffing money under the mattress is a cheaper savings proposition.
Priced In, Or Not Priced In, That is the Question?
So how can stocks be up in double digit percentage terms when we face an uncertain U.S. presidential election, a fiscal cliff, unsustainable borrowing costs in Spain, and S&P 500 earnings forecasts that are sinking like a buried hiker in quicksand (see chart below)?
I guess the answer to this question really depends on whether you believe all the negative news announced thus far is already priced into the stock market’s below average price-earnings (P/E) ratio of about 12x’s 2013 earnings. Or as investor Bill Miller so aptly puts it, “The question is not whether there are problems. There are always problems. The question is whether those problems are already fully discounted or not.”
Source: Crossing Wall Street
While investors skeptically debate how much bad news is already priced into stock prices, as evidenced by Bill Gross’s provocative “The Cult of Equity is Dying” article, you hear a lot less about the nosebleed prices of bonds. It’s fairly evident, at least to me, that we are quickly approaching the bond cliff. Is it possible that we can be entering a multi-decade, near-zero, Japan-like scenario? Sure, it’s possible, and I can’t refute the possibility of this extreme bear argument. However with global printing presses and monetary stimulus programs moving full steam ahead, I find it hard to believe that inflation will not eventually rear its ugly head.
Again, if playing the odds is the name of the game, then I think equities will be a better inflation hedge than most bonds. Certainly, not all retirees and 1%-ers should go hog-wild on equities, but the bond binging over the last four years has been incredible (see bond fund flows).
While we may sink a little lower into the equity quicksand while the European financial saga continues, and trader sentiment gains complacency (Volatility Index around 15), I’ll choose this fate over the inevitable bond cliff.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in KCG or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Financial Olympics: Chasing Gold, Siver & Bronze
Article is an excerpt from previously released Sidoxia Capital Management’s complementary August 1, 2012 newsletter. Subscribe on right side of page.
As a record number of 204 nations compete at the XXX Olympic Games in London, and millions of couch-watchers root on their favorite athletes, a different simultaneous competition is occurring…the 2012 Financial Olympics. So far, both Olympics have provided memorable moments for all. While the 2012 London Olympic viewers watched James Bond and Queen Elizabeth II parachute into a stadium filled with 80,000 cheering fans, investors cheered the Dow Jones Industrial Average above the 13,000 level on the same day of the opening ceremony. We have already witnessed a wide range of emotions displayed by thousands of athletes chasing gold, silver, and bronze, and the same array of sentiments associated with glory and defeat have been observed in the 2012 Financial Olympics. There is still a way to go, but despite all the volatility, the stock market is still up a surprising +10% in 2012.
Here were some of the key Financial Olympic events last month:
Draghi Promises Gold for Euro: Some confident people promise gold medals while others promise the preservation of a currency – European Central Bank President (ECB) Mario Draghi personifies the latter. Draghi triggered the controversy with comments he made at the recent Global Investment Conference in London. In the hopes of restoring investor confidence Draghi emphatically proclaimed, “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” To view this excerpt, click video link here.
U.S. Economy Wins Bronze: Whereas Europe has been disqualified from the Financial Olympics due to recessionary economic conditions (Markit predicts a -0.6% contraction in Q3 eurozone GDP), the U.S. posted respectable Q2 GDP results of +1.5%. This surely is an effort worthy of a bronze medal given the overall sluggish, global demand. Fears over a European financial crisis contagion; undecided U.S. Presidential election; and uncertain “fiscal cliff” (automatic tax hikes and spending cuts) are factors contributing to the modest growth. Nevertheless, the US of A has posted 12 consecutive quarters of economic growth (see chart below) and if some clarity creeps back into the picture, growth could reaccelerate.
Source (Calafia Beach Pundit)
No Podium for Spain: Spain’s recent economic achievements closely mirror those of the athletic team, which thus far has failed to secure a sporting medal of any color. Why no Spanish glory? Recently, the Bank of Spain announced the country’s economy was declining at a -1.6% annual rate. Shortly thereafter, Spain estimated its economy would contract by -0.5% in 2013 instead of expanding +0.2%, as previously expected. Adding insult to injury, Valencia (Spain’s most indebted region) said central government support would be needed to repay its debts. These factors, and others, have forced the Spanish government to adopt severe austerity measures to cut its budget deficit by $80 billion through 2015. Spanish banks have negotiated a multi-billion-euro bailout, but they will have to hand control over to European institutions as a concession. Considering these facts, combined with an unemployment rate near 25%, one can appreciate the dominant and pervading losing spirit.
Global Central Banks Inject Financial Steroids: The challenging and competitive global growth environment is not new news to central bankers around the world. As a result, finance leaders around the world are injecting financial steroids into their countries via monetary stimulus (mostly rate cuts and bond buying). Like steroids, these actions may have short-term invigorating effects, but these measures can also have longer-term negative consequences (i.e., inflation). Here are some of the latest country-specific examples (also see chart below):
- U.S. Federal Reserve Chairman Ben Bernanke has already shot a couple “Operation Twist” and “QE” (Quantitative Easing) bullets, but as global growth continues to slow, he has openly acknowledged his willingness to dig into his toolbox for additional measures under the right circumstances, including QE3.
- The PBOC (People’s Bank of China) surprised many observers by employing its second rate cut in less than a month. The PBOC lowered its one-year lending rate by 0.31% to 6%.
- The ECB (European Central Bank) lowered its key lending rate by 0.25% to an all-time low of 0.75% and also cut its overnight deposit rate (the equivalent of our Federal Funds rate) by 0.25% to 0%.
- Brazil’s central bank recently cut its benchmark Selic rate for the 8th time in a year to an all-time low of 8% from 12.5%.
- South Korea’s central bank lowered its key interest rates by 0.25% to 3%, its first such action in three years.
- The BOE (Bank of England) raised its quantitative easing goal by 50 billion pounds (~$78 billion).
Source (Calafia Beach Pundit)
Banks Disqualified from Libor Games: As a result of the Libor (London Interbank Offered Rate) rigging scandal, Barclays CEO Robert Diamond resigned from the bank and agreed to forfeit $31 million in bonus money. Libor is a measure of what banks pay to borrow from each other and, perhaps more importantly, it acts as a measuring stick for determining rates on mortgages and other financial contracts. In an attempt to boost the perceived financial strength of their financial condition, multiple banks artificially manipulated the calculation of the Libor rate. Ironically, this scandal likely helped consumers with lower mortgage and credit card rates.
Rates Running Backwards: Sports betting on teams and events is measured by point spreads and numerical odds. In the global debt markets, betting is measured by interest rates. So while losing, debt-laden countries like Greece and Spain have seen their interest rates explode upwards, winning, fiscally responsible countries (including Switzerland, Austria, Denmark, Netherlands, Germany, and Finland) have seen their bond yields turn NEGATIVE. That’s right, investors are earning a negative return. Rather than making a bet on higher yielding bonds, many investors are flocking to the perceived safety of these interest-losing bonds (see chart below). This game cannot last forever, especially for individual and institutional investors who require income to meet liquidity and return requirements.
Source (The Financial Times)
China Wins GDP Gold Medal but No World Record: China currently leads in both the Olympic Games gold medal count (China 13 vs. U.S. 9 through July 31st) and GDP competition. Given the fiscal and monetary stimulus measures the government has implemented, it appears their economy is bottoming. Despite the tremendous anxiety over China’s growth, China’s National Bureau of Statistics just announced a +7.6% Q2 GDP growth rate (see chart below), down from +8.1% in Q1. Although this is the slowest growth since the global financial crisis, Even though this was the slowest GDP growth rate in over three years, most countries would die for this level of growth. Adding evidence to the bottoming storyline, HSBC recently reported the preliminary Chinese PMI manufacturing index rose to 49.5 in July, up from 48.2 in June – the highest reading since early this year (February).
Source (Calafia Beach Pundit)
Higgs Wins God Particle Gold: Michael Phelps and Missy Franklin are not the only people to win gold medals in their fields. Peter Higgs and fellow scientists had 50-years of their physics research validated when the Large Hadron Collider discovered the long-sought Higgs boson (a.k.a., the “god particle”). The collider, located on the Franco-Swiss border, measured approximately 17 miles in length, took years to build, and cost about $8 billion to finish. Pundits are declaring the unearthing of Higgs boson as the greatest scientific discovery since the sequencing of the human genome. Higgs’s gold medal may just come in the form of a Nobel Prize in Physics.
Source (The Financial Times)
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in Barclays or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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