In this series of articles, we include important or interesting
videoclips with our comments. This is an article that expresses our
personal opinions about comments made on Television and in Print. It is
NOT intended to provide any investment advice of any type whatsoever.
No one should base any investing decisions or conclusions based on
anything written in or inferred from this article. Investing is a
serious matter and all investment decisions should only be taken after a
detailed discussion with your investment advisor and should be subject
to your objectives, suitability requirements and risk tolerances.
1. Just when people had forgotten,
Folks were so focused on Bernanke & corporate earnings all week that they had forgotten about Europe. VIX traded with a 15-handle on Thursday and complacency reigned. Presto on Friday, the mess in Spain splashed on investors’ windshield. The province of Valencia announced that it would need liquidity support. The Euro fell, the Spanish IBEX fell by 7% and Spanish Bond yields went above 7%.
Egan-Jones cut Spain’s ratings to CCC+ from CC+. Sean Egan told CNBC Money in Motion on Friday:
- The end game (for Spain) is the country, the banks & the regional governments don’t have enough money; they have too much debt and not enough capacity to pay that debt. We think there is eventually going to be a restructuring in Spain the same way there was in Greece. Spain has 4 massive problems that they have to deal with over the next couple of years –
- over 24% unemployment,
- a govt deficit to gdp of 8%,
- funding costs over 7% and
- massive real estate losses that haven’t been recognized by their banks…
- Ultimately, we think there is going to be restructuring……unfortunately, they are reaching the point of no return….20% of market realizes that Spain will be better off with restructuring, by end of the year they will probably move up to 60% and you are likely to see something tangible in place by early next year.
No wonder the Euro has traded to a 2-year low!
On June 23, Dennis Gartman and Mark Newton of Greywolf spoke of a short term bottom in Oil. How prophetic were these words? USO, the WTO ETF, has rallied from 30.10 on June 22 to close at 34.20 on Friday, a rally of 14%, BNO, the Brent ETF, has rallied from 64.94 on June 22 to close at 75.76, a rally of 17%. Oil stocks have participated, with OIH rallying by 12% since June 22.
So what now? Dennis Gartman came on CNBC FM-1/2 this week and heaped scorn on projections of oil going to $200 if Iran does something in the Straits of Hormuz. He thinks oil might temporarily spike to 112-115 in that case. He said he expects oil prices to back off from this week’s levels. His fellow FM folks remain bullish on oil and point out that oil tends to rally between mid-August to mid-November.
CNBC hasn’t asked Mark Newton for his update but we point out that, on June 22, he had called for a 15-20% potential bounce from WTI lows. That has been realized.
Abigail Doolittle of Peaktheories spoke in classic technicalese on Friday evening – “If WTI goes over $95, then it could go to $107, but ultimately it could resolve to the downside”. How far down? She privately told CNBC’s Tim Seymour that crude could fall to $30-$50. Luckily for us, Mr. Seymour does tell and in public.
3. U.S. Treasuries & U.S. Economy
Everyone Hates Treasurys Now is the title of a post by John Carney, senior editor at CNBC. Mr. Carney was referring to the “universal hatred of Treasury Bonds” expressed at this week’s CNBC’s Delivering Alpha conference. “Speaker after speaker castigated U.S. Government Bonds“, wrote Mr. Carney. These speakers included Greg Fleming who runs BAC-Merrill Lynch Wealth Management, Marc Lasry of Avenue Capital and Leon Cooperman of Omega. Mr. Carney’s tweet on Wednesday actually provided more detail than his article:
- “Marc Lasry predicts ten year will be at 2.5 to 3. Greg Fleming goes for 3.5 to 4.”
How we wish these gurus would be right and soon? We would love the buying opportunity a sell-off would provide. Mr. Cooperman has never spoken well of Treasuries, not even when they were yielding 5%+ in June 2007. Richard Bernstein has pointed out that Treasuries have been the most despised asset class for many years.
The 10-Year Treasury yield touched a new low of 1.437% intra-day on Monday. That afternoon, Adam Johnson (@AJInsight) of BTV tweeted:
- “Tom DeMark to me today: SELL signal on 10-yr (new record btw at 1.44%), DXY at 12 count could produce SELL tomorrow (and EURO potential BUY).”
Mr. Johnson has not updated us whether the DeMark Sell Signal on DXY was actually produced or not. If Mr. DeMark is wrong on Euro being a buy, could he be wrong on his Sell signal on 10-Yr Treasury?
Richard Bernstein (@RBAdvisors) predicted the opposite in his tweet on Wednesday morning:
- “Treasuries below 1.5%. Likely to go lower as EM problems get bigger.”
As Mr. Bernstein begins tweeting, we hope his friend David Rosenberg is not far behind in joining the Tweeterverse.
What about fundamentals, you ask? In response, we feature a videoclip of Lakshman Achuthan (we never get tired of these two highbrow, august names) on BTV. His opinion – “I think we are in a recession, already.” (see clip 4 below) The original Lakshman was hot-tempered, somewhat arrogant and constantly rushed to judgement. In contrast, Mr. Achuthan’s judgement hardly ever seems rushed.
For a differently phrased argument, read the American Pie in the Sky article by Nouriel Roubini:
- for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed. – (Roubini provides 5 reasons in the article).
- A significant equity-price correction could, in fact, be the force that
in 2013 tips the US economy into outright contraction. And if the US
(still the world’s largest economy) starts to sneeze again, the rest of
the world – its immunity already weakened by Europe’s malaise and
emerging countries’ slowdown – will catch pneumonia.
4. U.S. Stock Market
The S&P closed at 1376 on Thursday, just above its recent high. VIX closed down 4.4% on Thursday at 15.45. Helene Meisler (@hmeisler) of Real Money tweeted after the close:
- “DJIA closed at 12943 on 7/3. Closed there today too.”
Could this be a subtle suggestion of a possible double top? Mr. Lawrence McMillan of Option Strategist saw it differently:
- “$SPX exceeded its early
July highs today. That is a new high for this recovery rally that began
in early June. As a result, the classic bullish pattern of higher highs
and higher lows on $SPX has expanded and been strengthened by adding
this new high (see Figure 1).”
- “In summary, we remain
bullish in line with our indicators. If the market gets overbought
enough for another short-lived decline (much like the recent 6-day
decline) we would view it as a buying opportunity, as long as the lower
rising channel line on $SPX remains intact.”
Tom McClellan of the McClellan Oscillator fame voiced a similar theme in his GE’s Share Price Has Message for Market article (recall that Mr. McClellan predicted a powerful rally into the November election back on June 7, 2012).
- “The divergences highlighted in this chart illustrate how GE is worth
listening to when it fails to confirm a higher high for the DJIA. The
duration of that message is typically fairly short, calling for a swoon
lasting for only up to a few weeks. And once a corrective move does
appear in each of these, then the slate is wiped clean and they can
start upward again. In other words, once the weakness appears that GE’s
share price was warning about, then the warning has been fulfilled and
- “So now that we have GE’s share price adding its own note of caution, it
appears even more likely that a brief swoon is about to unfold.”
We are simple folk and understand the above. And we are fans of the simple but profound philosophy of Alfred P. Doolittle (of My Fair Lady fame). But Abigail Doolittle writes articles that task our meager brain. For our bright readers, we suggest her article The VIX:It’s Complicated. She opens the article with:
- “An interesting message may be coming from the combination of the VIX’s daily, weekly and monthly charts and that is of an explosive move ahead.“
The body of the article is devoted to dissecting the evidence. She ends the article with:
- “If bearish (for VIX), it will send a signal to expect a few years of bullishness
from the S&P, but if bullish, it points to an extreme and seemingly
instant correction in the S&P that may result in a rapid reversal
She seemed to favor the “extreme and seemingly instant correction” possibility in her Friday’s article RUT:One Scary Chart.
5. Stocks & Sectors
The biggest stock news of the week came from Jim Chanos, the noted Hedge Fund manager. He presented his best idea at CNBC’s Delivering Alpha conference. It was “Short Hewlett Packard”, a stock that is already down 25% for the year (see clip 5 below).
Dan Niles, the veteran tech analyst and now a Tech hedge fund manager, appeared on CNBC FM-1/2 on Friday with a bearish message:
- “My feeling is market sells off between now and the end of the year…part of the trouble.. is you have got big product launches later this year….Microsoft – windows 8 delivers touch to the PC in October….so why would anybody want to buy a portable in front of that? You are gonna wait ….Apple – they have got iPhone 5 coming out around October and a new smaller … tablet…so demand is gonna slow in front of that as well as people wait…this makes the near term tough…but as you get into Q4, they will become very interesting plays..”
Niles also said that Intel’s guidance for the rest of the year seems unattainable.
Robert Albertson, a veteran banking analyst, gave his cup is 2/3rds full opinion of US Banks on BTV’s Surveillance this week. His views are interesting and a bit out of consensus (see clip 6 below). Mr. Jamie Dimon of JP Morgan Chase seems to agree with him. Mr. Dimon reportedly bought 500,000 JPM shares at around $34.22 in the open market this week.
- Preet Bharara at CNBC’s Delivering Alpha Conference on Wednesday, July 18
- Henry Paulson & Robert Rubin at CNBC’s Delivering Alpha Conference on Wednesday, July 18
- Henry Paulson with CNBC’s Maria Bartiromo and Steve Liesman on Wednesday, July 18
- Lakshman Achuthan on BTV Surveillance on Tuesday, July 10
- Jim Chanos at CNBC’s Delivering Alpha Conference on Wednesday, July 18
- Robert Albertson on BTV Surveillance on Wednesday, July 18
1. “Preet Bharara on line two” – Preet Bharara with CNBC’s Jim Cramer – Wednesday, July 18
U.S. Attorney Preet Bharara is now a household name in the financial community. Preet means love, affection. You would expect a man named Preet to be gentle, loving just as much as say, you would expect a man nick-named Rosie to be happily bullish. With his fearsome reputation, no one attending CNBC’s Delivering Alpha conference expected Mr. Bharara to be loving or gentle. But he turned out to be really funny and witty.
The clip below of Secretary Henry Paulson deserves to get our pole position for this week. But, we exercise our right to ethnic pride and place this Bharara clip in the pole position. Attorney Bharara did the entire investment community, especially individual investors like us, a great favor with his successful convictions in insider trading. He did the entire Indian-American community a tremendous favor by his convictions of prominent, celebrity successes from the Indian subcontinent.
Readers of this Blog know that we are often extremely critical of India, the land of our birth, education and culture. We warned about a credit bubble in India in July 2011. A couple of weeks ago, we wrote an article titled Why Does India Tend to Collapse So Often? This article has been transmitted and retransmitted via email in India. We have received comments from small towns and major metros all over India. To our delight and relief, over 90% of the comments have been supportive and positive.
Our basic issue is that India and Indians are usually soft and do not speak up or fight for what they believe. Mr. Preet Bharara is an embodiment of what we would like Indians, especially ‘educated’ Indians to be. These are the personal, non-investment reasons for our decision to award this clip the pole position for this week.
We urge all to view this entire clip. It is funny, entertaining and yet extremely serious. Kudos to Jim Cramer for a superb interview. Very very few could have done as good a job as Cramer did.
At least watch the first 60 seconds of this clip. As senior editor John Carney wrote,
- “Preet Bharara…got more laughs during his interview with Jim Cramer than anyone else who has appeared on the stage at the Pierre Hotel.”.
Carney also added,
- “The audience appeared genuinely amused….Although one person sitting be
side me pointed out: “These guys had better laugh at his jokes. Or else Preet might show up with a search warrant.””
Read the CNBC transcript of the interview posted on CNBC.com. It is really a must read for every investor. The basic message of the interview was summed up by Jim Cramer in his article Cramer Praises Wall Street’s Sheriff Bharara on CNBC.com. Cramer concludes his article with:
- “Anyone who watched Mr. Bharara today knows that not only could he run a
hedge fund or head up a private equity firm, but he’s smarter and more
sophisticated than just about anyone who does,” Cramer said. “Why is
that important? Because if you’re a fund manager who thinks he can get
away with insider trading today, either because you masked it or because
you think no one is listening, all I can say is that you’d better be
prepared to hear the five most frightening words in the financial
lexicon, ‘Preet Bharara on line two.’”
2. Structural Issue in U.S. Competitiveness – Henry Paulson & Robert Rubin with CNBC’s Maria Bartiromo & Steve Liesman – Wednesday, July 18
CNBC Delivering Alpha Conference brought together Henry Paulson & Robert Rubin, the two former Treasury Secretaries, in a panel discussion. This is a truncated clip but short & sweet.
- Rubin – it’s an interesting question whether QE2 was a constructive influence because it did help keep yields down, if it did, I’m not so sure it did that much, Or whether it simply extended a period and, a period in which the politicians were not subject to as much pressure and a QE3 at least in my opinion would be unlikely to have much economic effect because rates are already so low and because they’re not rates that are the problem or the deterrent to investment, a whole powerful set of other factors was pushing a wet noodle.
- Liesman – what are the main reasons you believe this economy has not popped and give a classic sort of post-recessionary expansion?
- Paulson –
- first, the de-leveraging is still going on. you know, we had the bubble, it popped. we had the great recession, it takes time. that’s one reason.
- second, there clearly is uncertainty around the government’s ability and willingness to act with the fiscal issue.
- thirdly, and this is something I focused on in quite a bit recently, I think there’s,…one of those is cyclic, the other is the government issue, there’s a longer term secular decline, it’s a structural issue in U.S. competitiveness, and I define competitiveness this way.
- Can U.S. companies successfully compete with those around the world and the United States have a rising standard of living? To me that’s what competitiveness is. If you’re just cutting, that’s not competitive patience. If I’m right, then the economy isn’t going to get to where we want to just by waiting. It’s going to take some policy actions to address the competitiveness issue.
- Liesman – Bob, I want to ask you to pick up on that, because when Hank talks about a competitive issue, the question becomes does America, do Americans have to think about a lower standard of living?
- Rubin – I think we need to meet three great challenges if we’re going to realize that potential and I say this recognizing the transformation of the global economy. even in that context we could do very well but
- I think we have to have a sound fiscal regime, for all kinds of reasons,
- secondly, I think we must have greatly increased public investment in education, infrastructure and the like, and that’s got to be included in creating a budget that gives us a sound fiscal regime and
- thirdly we need to have reform in areas like immigration, health care, education, and many other areas.
3. “Much more of a Government Crisis than a Economic Crisis” – Henry Paulson with CNBC’s Maria Bartiromo & Steve Liesman – Wednesday, July 18<
Secretary Paulson visited with Maria Bartiromo and Steve Liesman after the above joint appearance with Robert Rubin.
- Bartiromo – I was really struck by what you said, you said oh they will deal with it, meaning leadership in Washington, but the question is will they deal with it before the crisis or after the crisis. So if they don’t deal with it, we will have a crisis, is that what you’re saying?
- Paulson – absolutely, it’s the most inevitable thing you have ever seen. This huge fiscal problem staring us in the face, and the markets giving us plenty of time to deal with it, and I think the reason is market is giving us so much time, is that we are a rich economy and what the Bowles-Simpson recommendation showed is that we have flexibility to make some real progress there spreading the sacrifice around so no one sector sacrifices too much. So this is in many ways, much more of a government crisis than a economic crisis. But another thing we said, and Bob Rubin and I said the same thing, it’s impossible to know when the market will turn. but when it does, it will do to with a vengeance.
- Liesman – In a way we’re distracted by this fiscal cliff issue. Keep your eye on the prize and the prize is growth, and the issue is competitiveness when we talk about the long-term prospects of America.
- Paulson – Maria, the point that I made is that if you look at our current economic problems, there’s probably three reasons for it. first of all, obviously, we had the great recession, this huge deleveraging going on. That’s cyclic and that will come back over time. Secondly there’s the uncertainty around the government’s ability or willingness to act on the fiscal cliff. But then thirdly, we have a competitiveness issue. and the way I define competitiveness is this – Can U.S. businesses compete with those around the world and have our standard of living go up? We’re not competitive if we are just cutting and our standard of living is going down. We’re debating the wrong things. What should we do with high income earners with the tax system? No one is really debating the fact that we need a totally new tax system to give us the revenues we need and let us be competitive.
- Bartiromo – Why haven’t we see that yet? Steve, I feel like every time we hear from the Federal Reserve it’s on all on the Fed…. Why are we not hearing more on what the fiscal policy side.
- Liesman – there was discussion from Bob Rubin that maybe the Fed is bailing out the political side as well. Hank didn’t want to talk about monetary policy.
- Bartiromo – That’s why I didn’t ask you, but I knew you would say that.
- Paulson – Here is what I said, you have to just look at the facts and this is happening to central banks everywhere. The problems are fiscal problems in Europe and the U.S., and they are competitiveness problems. It’s not just cutting. It’s how do we have real reform and policies that let us grow and create jobs and have rising income? The Fed can’t deal with that. But the Fed is left with few choices. They’re the only institution that can act. So I don’t find fault with what they’re doing. I don’t go to sleep at night worrying about inflation. And he is protecting the downside.
- Bartiromo – I don’t f
ind fault in what he’s doing, He’s the only one doing anything.
- Paulson – That’s right. He is the only one doing anything, but what we need — we need to debate the big issues.… One of the things that Steve asked, he said Hank, if the only thing standing between solving the problem was raising the rates for the highest earners, what would you do? and I said the reason I’m not going to answer that question, is because I‘ll be disgusted if all we do is raise rates for a system that doesn’t work. ..Half of the American voters pay no federal income taxes. I would be fine, personally, with having those earning the most pay more if it was part of a system that was going to work and give us the revenues we need and let us be competitive. But we have a broken tax system.
- Liesman – I didn’t get to ask you during the event about China. I think one of the questions out there is how long can we count on China to be a principal buyer and roller over of our debt.
- Bartiromo – This is a great question. You wrote about this in your book.
- Paulson – People raise that question all the time, and it’s the most frequent question I get about China. Don’t you hate the fact that they’re buying our debt and so on? I say I hate the fact that we have so much debt, okay? I hate that fact. But when you look at what China is doing, China is buying our Treasuries not to be good to us, they’re buying the Treasuries because they have to put their money somewhere, okay? They have to put their money somewhere, and are they going to choose the euro, the yen, where are they going to put it? In terms of the risk, when you look at the percentage on Treasuries they’re buying, they the biggest buyer of treasuries, it was 9% or 10%. It’s a third to half of their foreign exchange reserves. So this is a bigger issue for China than for us. So when I talk about moving their currency and why it’s in their best interest, I said they have two choices, they can either, you know, move to a market determined currency, or they can keep buying to prop up their currency, they can keep buying euro bonds and dollars and funding our structural deficits.
- Bartiromo – Do you think all of these issues will impact Obama’s reelection? But Romney has a real shot in all of this.
- Paulson – I will simply say I do think the president, the person that’s elected president, should be the one that makes the best case on the economy. Because let me tell you something, everything starts with our economy – our national security, our foreign policy, everything starts with our economy. It’s much different as a Treasury secretary when you’re telling other people what you would like them to do. let me tell you, I’ve seen it. I watched it when your economy is performing well. I watched it when I was talking to the Chinese before the financial crisis and after the financial crisis. So I have seen it. and I’ve been on my knees in front of Congress. I don’t think we will ever be on our knees globally, we are still the richest strongest nation in the world but everything in this election should be about the economy and what we do to restore it. But what I don’t like, is how it is right now. and my concern is that the election will be so bitter that it may be hard for the parties to get together and compromise.
4. “I think we are in a Recession already” – Lakshman Achuthan on BTV Surveillance – Tuesday, July 10
We thank BTV PR for this excellent summary.
Achuthan on whether he can reaffirm his recession call from last year:
“Yeah…I think a lot of people forget what our call was. What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I’m here to reaffirm that. I think we’re in a recession. I think we’re in a recession already. As I said back there, it is very rare that you know you’re going into recession when you’re going into recession. It often takes some big hit on top of the head. In the last recession, it took Lehman to wake people up and the recession before, it took 9/11.”
On how ECRI defines recession:
“It is not our definition. It is the definition of what a business cycle is, which was established by my mentor Jeffrey Moore’s mentor Wesley Mitchell back in the 1920s. What is a recession? It is not a statistic; it is a process between production, employment, income and sales. When you look at those four measures, they are rolling over.”
“It is not all about GDP. It is about jobs. It is about income and sales. A recession is a vicious interplay among output input employment, income and sales. When you look at 2001, you can’t find two negative quarters in a row, yet you lost 3 million jobs. Or half the value of the NASDAQ. How are you going to tell someone that wasn’t a recession? When you look at the data today, you see that industrial production is off of its April high. Manufacturing and trade sales, much broader than retail sales, is off its December high. Real personal income growth, which does not always go negative during a recession, has been negative for several months so it is consistent with a recession having already started.”
On what the relative optimists get wrong in economics today:
“I think there is this belief that somehow government or a central bank will stave off a recession. For the last 220 years, you do some history with Hamilton, which ended in a duel by the way…you have had 47 recessions. Why are we going to avoid the 48th? Here we are in the wake three years out of the last recession. You see this leading indicator. It leads, it is the drivers of the business cycle and it is doing this bumping down. People look it that and they say, each time they throw in some money or do something, you get less for it. I am surprised given the trillions of dollars spent around the world that that indicator is as weak as it is. That is a recessionary reading.”
On why the U.S. is struggling:
have entered these so-called yo-yo years. We have been seeing weaker
and weaker expansion since the mid 1970s. We have not been freaked out
by it because the business cycle has been pretty mellow over the last
20-25 years. Until now. So if you have a more volatile business cycle
and low growth, you get more recessions and you start to destroy
people’s ability to earn. In particular, when we talked slower
expansion, we’re not talking GDP, we’re talking jobs, too. In particular
you’re seeing no jobs growth.”
On how globalization plays into indicators:
- “There’s a lot of things in there. Globalization is part of it. There’s a lot of one offs that have occurred in the last decade. The falling of the iron curtain. The emergence of China and India. A lot of productivity growth. A lot of aging of the population. So there is a lot of a factors in here at work. But when you are competing, as we are globally, companies are trying to squeeze their costs. People are a big part of that. What you see is what is alarming right now, people that are in their prime earning years, which is roughly from 35 to 54, over the last two years, they have lost jobs. Net jobs have been lost for that cohort of the American job market and that is when you’re supposed to make your money.”
5. Short HPQ – Jim Chanos at CNBC’s Delivering Alpha – Wednesday, July 18.
This is a rare discussion of his approach by a very successful hedge fund manager. Jim Chanos laid out his case for shorting Hewlett Packard.
- I want to talk today about one idea that fits a theme that we’ve seen in our portfolio over the last 12 years. And that is some of the very best short ideas that we’ve worked on and made money on for our clients were actually cheap stocks – so-called value stocks, that due to a variety of different reasons, just got cheaper and cheaper and cheaper and in many cases went out of business.
- and one of the things in our business that I see is people have a tendency sometimes to get a little bit lazy. And they’ll look at stocks on some basic metrics, whether it’s PE ratios or the fact that marquee investors have gone into the stock. and they stop doing their work. In the case of a value trap, that can be a disaster.
- Okay. So in the area of technology, I‘ll focus where my idea is today. But this applies to a variety of different industries. Some common characteristics of these traps:
- – typically in this particular industry you see a seismic shift in technology. which means that the value stock is now basically cheap because investors perceive it won’t grow very much at all.
- people still, however, look at the product line in terms of hindsight and say, well, I can harvest that cash. and maybe if something comes out of the lab, whatever, I have a free call option. you hear that all the time.
- You typically have well-known management and investors involved. the stocks appear cheap, whether on standard metrics or often management-driven metrics, so-called nongap earnings or EBITDA, whatever you have here.
- And generally there’s some accounting issues involved. again, use of nongap earnings, but as you’ll see, hopefully, as I continue, the accounting issues usually are much more serious than that.
- So the idea I’m going to talk about basically occupies the PC space. Now, it’s no secret that PC business is under a little bit of pressure. Intel reported last night – revised on its guidance. Dell has had its problems. And it’s for the reasons you would suspect. You go into a meeting like this or a conference like this, you used to see a proliferation of laptops. Now you’ll see just as many tablets. In some meetings I go to, tablets outnumber laptops four to one, five to one. I think that’s going to continue as tablets become not only a media consumption device but actually an input device…as more and more functionality, moves to the cloud, people become device agnostic.
- these three lines are the current trends in pcs, smartphones, which began their ramp a couple years ago, the middle line, and tablets which are just starting their ramp.
- what they will tell you is that the stock is cheap with a forward PE of five times, an enterprise value of EBIT to roughly six times. and great free cash flow, free cash flow yield of 10.7%. using the latest 12-month figures, and a stock that’s buying back lots of stock – all the classic signs of a great value situation, hopefully.
- there’s a fly in the ointment. Not only on the left can you see that that number is trending down, but much, much more importantly, in the case of Hewlett-Packard and a number of other well-known marquee technology companies, they are hiding their R & D spending through acquisitions.
- this is an important concept that a lot of people miss. That is if you look at Hewlett-Packard’s revenue stream, it’s basically flat over the past number of years. Their
cash flow is basically flat over the past four or five years. But they have done $37 billion in acquisitions over that time frame. Those acquisitions have enabled them to maintain a revenue base and see a declining cash flow base. Those are maintenance capital expenditures or maintenance R & D hidden as acquisitions. And when you value the company, when you begin to look at the fact that this company has purchased its R & D, capitalized it, if you will, R & D is normally expensed, you begin to see a totally different picture. Look at the middle of the left table which shows you that the free cash flow before buybacks and dividends, but after cap and acquisitions a much different animal and has turned negative. In addition, the balance sheet has been destroyed here.
6. Sufficient Reserves to handle Two, not One, Depressions – Robert Albertson on BTV Surveillance – Wednesday, July 18
Robert Albertson has been a well-regarded banking analyst for a long time. He has been dead wrong on the direction of interest rates for some time but that puts him in company of the majority of the Street. His views on banks have been generally accurate. This clip offers a different view, a longer time view, of American banks.
- It seems to me it is time to look at the cup 2/3rd full. When you look at the returns of these banks now,…, if you adjust for the 10-year, you see that banking profitability has come back about 80% of its old norm, with 28% more capital. So this industry does not have a broken model. It still has to deal with sluggish demand which is picking up, still has to deal with abnormal interest rates which better not be abnormal for ever. So you need to look forward and what I am seeing a continuum of positive news for the revenues even though the 2nd quarter was a tough one.
- We have still over 7,000 banks. We probably don’t need a couple of thousand of the very small ones. But the fact is the community and the regional banks are the unique financial advantage of the United States. They are the ones that can deliver credit to the local markets, entrepreneurs and local businesses. And they are doing reasonably well in this period. If you look at size, it is true that the larger ones have an advantage, particularly on expenses and they are clearly recovering faster than the smaller right now. Our concentration in large banks, we are actually below most other countries. Canada, which has virtually all its banks Too Big to Fail. It has become a canard. Size within a degree is a valuable thing.
- We are out of prop-trading. That’s gone. That’s not in any bank’s earnings. We are looking at numbers without that “huge advantage” of prop trading and the numbers are rather decent. They can handle it.
- (in response to where are we going to be in 5 years) – We are going to be down a little more on bodies for awhile and then we will be up substantially in 5 years. Because the financial sector is critical, it is doing its job and nobody is paying attention…. This industry has recovered, it has recapitalized, it has clean balance sheet, it is dealing with massive government price control, intervention, regulations and it is still showing darned-good profitability. Five years from now, when the demand is fully back, pricing will get better as well. So you are going to have a normal cycle. It is elongated this time because we have had an elongated recession. It has substantial upside.
- The larger ones are going to be here, pretty much the same way. It is the new super-regionals formation that we don’t know yet. And they are in formation. Five years from now, we will have 10 new names to talk about because of consolidation which is coming.
- Every thing I have said is assuming we get no where in the US economy. Bright as I see banking, I see a pretty dim US economy because we don’t have a consumption driver any more. So it has all got to be in businesses and investment. That however is good for banks. Those are the ones who lend to it.
He added a caveat though “if interest rates are going to be where they are for the next three years, it is not going to be pretty”.He then admitted he has been wrong before on rates and added that “momentum in interest rates will be to the upside when Europe calms down a bit. That’s gonna change the picture.”
His finishing point:
- The sector has sufficient reserves now to handle two, not one depressions and that’s according to the stats you can pull together. It has continued to build momentum in the business lending side, that is actually hot. That is a strong area.
Mr. Albertson also says the real action is going to be in emerging markets and does not believe the consensus (according to him) that there will be a fall in EM.
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