Monthly Archives: January 2010

The financial crisis–where are the indictments?

January 19, 2010 By in Portfolio management, Strategy Tags: , , , , , , Leave a comment

Something to keep watch on out of the corner of one eye–investigation of the financial crisis

Nothing much done so far…

To me anyway, one of the most striking aspects of the current financial crisis has been the lack of interest–so far–in investigating and prosecuting any possible illegal activity by banks or bankers that ended up putting us in the weakened financial condition we now find ourselves in.  Why has no one been held accountable?

Areas of possible investigation are numerous.  Who, if anyone, for example, falsified loan applications that allowed unqualified borrowers to purchase houses they couldn’t pay for?  What supervisors encouraged the process?  What did the people know who created the derivatives that exported the problems to other institutions?  What did they tell the counterparties?

How did the financial industry accumulate such large off-balance sheet liabilities of very low quality, in what seems like a large-scale repeat of the Enron debacle?

Who inside Bank of America decided to withhold the truth about Merrill Lynch’s weak financial condition from shareholders who were voting on the proposed merger?  Why was the SEC so eager to brush this under the rug?

How could Bear Stearns file a 10-K for 2007 showing $60+ in book value and be insolvent a few months later?  What about Lehman?  AIG?

…in contrast to the junk bond scandal

In the junk bond of the late Eighties, in contrast, Michael Milken was quickly called to task.  Prominent portfolio managers, if not jailed, were at least removed from their positions and barred from the investment industry.

The public wants an accounting…

Although they may not be able to cite details, the average citizen realizes that there is something wrong if millions have lost their jobs, their houses and their savings, yet the bankers who caused the problems are not only still employed but enjoying record paydays.  It isn’t that they’re rich that bothers people–after all, no one is angry at Bill Gates or Sergey Brin–but that the bankers have abused a semi-monopoly position to do untold economic harm to the country, yet they’re riding higher than ever.

People also can’t help but notice, as Robert Reich recently pointed out, that the banking lobby has contributed close to $400 million to Congress over the past year, most of that to legislators directly involved in policing the banking industry.  And if an incumbent’s constituents somehow aren’t aware, a challenger will be more than happy to enlighten them.

…and the political winds may be changing

The SEC, once apparently eager to cover up the BofA/Merrill affair, has recently filed additional charges.  And it has just begun a probe of collateralized debt obligations.  Why the interest now?

My guess is that Congress, deeply responsible for the financial crisis on both sides of the aisle, hoped that public anger would dissipate.  But it hasn’t.  If anything, the large profits banks are now making, and the huge bonuses they are paying to executives whose ineptitude caused the banking collapse, have fanned the flames of public discontent.

So the calculus of risk has changed.  Better to take the chance of being implicated through an investigation than to have the near-certainty of voter retribution if they do nothing.

Why this may matter

Throughout my career, I’ve thought that politics had a lot in common with sports.  That is, both are interesting, entertaining, but basically irrelevant for investors.  Under most conditions, gridlock would be the most probable, and also the best outcome one could hope for.

I now worry that as a country we’re deeply enough in debt that we can’t afford to suffer much more damage at the hands of Washington.  We could also get wholesale turnover in Congress next November if people stay (justifiably) angry about lack of action to prevent a new financial crisis, with unpredictable consequences.

Would we be better off with a bunch of new people who think natural resource companies should be nationalized so that somehow that would lower prices?  What would we do if we ended up with a crowd that thought we should let neighbors die of starvation/lack of medical care because their great grandfathers made a declaration of independence from Europe (thereby entering a pact with the devil).  I don’t know.  And uncertainty breeds lower prices.

Intel’s December 2009 quarter–exceptionally strong

January 18, 2010 By in earnings conference calls, Industry Analysis, Stock ideas, Technology Tags: , , , , , Leave a comment

INTC’s results

INTC reported results for its December 2009 quarter after the market closed last Thursday.

Revenues of $10.6 billion exceeded the high end of the company’s guidance and came within a whisker of equalling its December 2007 high-water mark.  Earnings per share of $.40 exceeded both consensus estimates of $.30 and the 2007 level of $.38.  Gross margin of 65% was an all-time record.

Ex charges for settling an intellectual property licensing suit with AMD, Intel earned $.55 for the quarter.

These are extremely impressive figures.

Intel also upped its guidance for first-quarter 2010 revenue from $9.4 billion to $9.7 billion and suggested that it expected 10%+ revenue growth for full year 2010.  This expectation, which I think is conservative, would imply earnings per share for the company in the $1.60-$1.70 range.

The details:

Strength was primarily in consumer demand.  The Americas and Asia-Pacific, up 15%  and 12% quarter on quarter respectively, were the stars.  Japan, up 8%, and Europe, +15%, lagged slightly behind their historical patterns.  Overall, quarter on quarter growth was about 2x the seasonal norm.

Among product categories, notebooks showed the sharpest growth.  Servers were also strong, with demand shifting to the higher (and more profitable) end.

Atom chips for netbooks became a $1.4 billion business for INTC during 2009.  Quarter on quarter growth was only 6%, suggesting (to me, anyway) that demand is starting to flatten out.  INTC made two interesting remarks about Atom, however:

1.  the company has studied the buyers of Atom-driven devices carefully and has detected virtually no cannibalization of traditional notebooks to date.

2.  until recently, typical buyers have been in the developed world and have wanted a second, simple, light device–often to replace a traditional laptop while traveling.  During the December quarter, however, 25% of purchases have been by telecom operators, for to give to customers purchasing a cell data contract.  INTC expects that this kind of purchase will quickly become mainstream, especially in the developing world.

Sell-through has matched sell-in closely.  INTC can see very clearly what is happening in customer businesses representing about 70% of sales.  While there was some inventory buildup from sub-normal levels during the quarter, as far as INTC can see, its results accurately represent end-user demand (rather than stockpiling by distributors or OEMs).

INTC now only expects a modest uptick in sales to corporations during 2010, as users replace the aging Windows XP with Windows 7.  This seems to me to be a change from the company’s prior belief that the shift would be rapid, because XP is so old and the costs of maintaining now-antiquated four-and five-year old PCs are so high.  Slow adoption would be the norm, as corporate data center managers wait for the bugs in new MSFT software to be found and fixed before they shift from an older system.  Likely?  See below.

After five years of slimming down, the company is starting to expand staff again.

My thoughts

I’m not an INTC expert, so take some of what I say with a grain of salt.

The current management of the company impresses me much more than I had expected when I started monitoring INTC a few months ago.  I still have a lot to learn, but I no longer consider it the corporate dinosaur I thought it has been for the past ten years or more.

INTC has somehow made the shift from an older generation of chips made with spacing between parts of 45 billionths of a meter to newer ones with 32 nanometer spacing, while spending less than its depreciation.  True, INTC is reclassifying some expenditures as research and development, but I find this still a startling achievement.

According to MarketWatch, the consensus earnings estimate for INTC for 2010 is $1.53 a share.  That’s a lot too low, I think.  If corporate PC purchases exceed INTC’s now-modest projection, even my $1.70 could prove low.  It may well be that the largest companies, citing security issues, will move with customary caution, but my guess is that smaller concerns won’t wait.

In response to an analyst’s question on the conference call, INTC pointed out that its strongest growth has been coming from emerging markets for years.  Who wasn’t aware of this? –at least one professional tech analyst covering INTC, implying that the scope for positive earnings surprise may be larger than I would have imagined.

Yes, there are warts.  The fourth-quarter tax rate is very low.  More important, it’s not clear to me how INTC will fare in an increasingly smartphone, e-reader world.  But at 12x this year’s earnings and a 3% prospective dividend yield, it doesn’t seem to me that there’s a lot of downside risk.  And if the management is as smart as I suspect it may be, INTC may well adapt to a new operating environment more easily than most expect.

Google, China and Rupert Murdoch

January 15, 2010 By in Asian economic development, China, economics, Industry Analysis, Technology Tags: , , , , Leave a comment

From Kant to Mao…

In the late eighteenth-early nineteenth century, thinkers in continental Europe began to shift from explaining the world as a well-made watch (basically static, “what you see is what you get”) to a biological metaphor that pictured the world as a growing, evolving organism.  They also started to worry that “common sense” experience might not be the open book everyone thought, but instead might contain deliberate deceptions of the unconscious mind.

Karl Marx developed the latter trains of thought into a theory of the evolutionary development of political forms culminating in a paradise of social and economic equality for all.  Lenin added the fillip that if the downtrodden masses weren’t traveling fast enough on the road to socialism, it would be ok for the Communist Party to speed the process up in any way–including lots and lots of violence– it could. (Yes, pretty simple-minded for today’s tastes.  But, for what it’s worth, replace “socialism” with “democracy” and you have the US neo-conservative position on the Middle East.)

For China, the last surviving overt bastion of this point of view, the Party is the guardian of truth; everything, including the communication of information, is politics.  The US, neo-cons aside, has pretty much stuck with the older idea that there’s a self-evident objective reality,  and a “right” way of doing things that everyone is capable of  figuring out by himself.

…to Google in China

This brings us to Google’s entrance into China.  On the one hand, China’s a huge, fast growing market.  On the other, as the price of entry into a media business there (every country in the world regards media as a strategically important field), Beijing required that Google allow search results to be censored–so, that searches like “Tiananmen Square massacre” or “Dalai Lama,” which might cast the Communist Party in an unfavorable light, would come up empty.

Google agreed to China’s conditions.  But the company also decided to host all its email from outside China, so that the government couldn’t simply get email data by physically grabbing the servers.  Gmail quickly became a favorite for human rights activists (though Beijing would probably describe them as political criminals instead).  In recent months, those accounts have been the focus of cyberspace attacks emanating from China.  A couple of days ago, Google finally got fed up and threatened to close up shop and leave China, despite its enormous  profit potential.  What it’s fed up about is less than clear.  My guess is that Google’s fear is that China’s next step will be to try to seize Google’s analysis of users’ search histories and patterns.

Should Google have expected any different treatment from what it has received?  It might have hoped for something different, but expected? –no.  From the earliest days of adopting the capitalist economic system, China made it clear that it was doing so because there was no other choice.  The economy was too big and too complex for central planning to work any more.

But China made it equally clear that this new freedom did not extend to politics, where the Party would remain supreme.  In particular, the government’s deepest fear has always been social unrest.  Anything that would lead citizens to question the party’s moral authority is forbidden.  After all, the Party is the group of visionaries that is leading the way to socialism.

Google’s stance is thoroughly American

I find something pleasingly American in Google’s position–the idea that the individual has “inalienable rights” apart from the group he is a member of.

This can’t be simply naivete

The US has a long history of rabidly partisan tabloid journalism.  In fact, News Corp., the greatest proponent in the English-speaking world (maybe the entire globe) of communication as a form of propagandizing, has been very active in US media for many years.  Writers for the Wall Street Journal, for example, have been complaining that since the News Corp. takeover the editing process now involves deleting references to Republican shortcomings and adding a double dose of Democratic miscues.  Taking a page–whether wittingly or not I’m not sure–from Lenin’s playbook, Fox News styles itself as “Fair & Balanced,” implying its rivals are not.  News has even spawned a (pale) imitator to its cable offerings from the left in MSNBC.  I’m not a particular fan of Mr. Murdoch or of Fox, but in a certain way you have to admire them both.

Yes, making itself a forum for a Republican point of view has made Fox News immensely profitable and has given it tremendous political clout.  But unlike the case in China, if you don’t already know this, you can easily find out from a rival publication–where, as in the citation above, you can also learn how Fox shapes the facts to fit its political bent.  Also, you won’t find the police at your door to arrest you for watching news on a non-Fox channel.  And I’ll still be blogging next week, as well.

What is it then?

My guess is that the optimists inside Google thought of the Communist Party in China as Murdoch writ somewhat larger.  They’ve now discovered their mistake and how different the political system there is.  Leaving is probably Google’s best option.

Beijing okays short selling, margin trading and index futures

January 14, 2010 By in Asian economic development, China, economics, Hong Kong Tags: , , , , , Leave a comment

New tools for professional investors…

According to Bloomberg, the China Securities Regulatory Commission changed the rules last week to allow all three practices on the Shanghai exchange for all Chinese citizens, as well as for the 94 foreign entities that have been approved as Qualified Foreign Institutional Investors(QFII).

…will increase the sophistication of Chinese markets

This is an important step in increasing the flexibility and potentially the liquidity of mainland Chinese equity markets.  Using these tools will doubtless end up increasing the trading skills and sophistication of domestic Chinese investing institutions.

Not an invitation to arbitrage Hong Kong and Shanghai shares, though

But I don’t think this by any means an invitation by Beijing for domestic players or foreigners to try to arbitrage away price differences between shares of the same company traded in Shanghai and those traded in Hong Kong.  Why?

1. Selling the more expensive shares short (unusually, in this case it would be the “A,” or local shares) and buying the cheaper ones (the foreign or “H” shares) isn’t something most institutions can do.  Chinese investors have only limited access to non-domestic stock markets, and even then only in specified formats; among foreigners only QFIIs have access to the domestic market and again only with clearly specified pools of money.

2.  The arbitrage would be financially risky.  A shares and H shares are separate classes of stock, not exchangeable from one class to the other.  In addition, they are traded in different stock markets, and among investors who have sharply different investment universes and risk preferences.   My perception of the history of dual classes, foreign and domestic, in Asia is that the more expensive class (usually the foreign shares) continues to become more expensive until the country in question decides to abolish the two-class structure.

3.  It would be politically risky, as well.  China has followed the lead of other developing countries in limiting the amount of a publicly-traded company that foreigners can own.  But it has gone a step further by keeping the bulk of foreign trading both physically and legally apart from domestic.  Why do this?  –to avoid the destabilizing speculation it witnessed in its own backyard during the Asian financial crisis of 1997.

In the US, we sometimes have a perverse admiration for individuals who can exploit legal loopholes to thwart the intent of government regulation, and congratulate him for having done so.  In China, on the other hand, a group that engineers a stock market decline that damages the country and engenders social unrest, but which they benefit from, may be more likely to be convicted of political crimes and imprisoned for a very lengthy period than feted.  I’m not arguing, here anyway, for one system or the other–just observing that the rules of conduct outside one’s home market may be far different from what one is used to.