Here’s the link–or you can just click that tab at the top of the page.
the National Retail Federation survey…
The National Retail Federation released the results of its annual Thanksgiving weekend shopping survey, consisting of interviews of 4300+ consumers, yesterday.
The headline results are: bigger crowds, $45 billion spent–up about 9% year on year.
The actual survey results, also available on the National Retail Federation site linked to above, contain more interesting information, namely:
–people traded up. Shopping at discount stores dropped from 34.2% of the respondents in 2009 to 40.3% this year. In contrast, department store shopping rose from 49.4% to 52.0%, and specialty retail store patronage grew from 22.9% to 24.4%.
–the types of gifts shifted from necessities to discretionary items. For example,
—–14.3% of respondents said they bought jewelry last weekend vs. a low of 9.6% in 2007, 10.9% in 2008 and 11.7% in 2009
—–33.6% bought books, CDs, videos or video games vs. 41.7% in 2007, a low of 39.0% in 2008 and 40.3% in 2009
—–24.7% bought gift cards/certificates vs. 21.0% in 2007, a low of 18.7% in 2008 and 21.2% in 2009
—–of economically sensitive spending areas, only housing-related (home decor and furniture) is a significant laggard. Among survey respondents, 20.2% are spending on this category this year vs. 19.6% in 2007, 20.3% in 2008 and 19.9% in 2009.
–a third of all purchases, by dollar value, were online, with 33.6% of respondents saying they had shopped on the internet.
Many news sources, the New York Times, for example, are reporting that shoppers were also buying things for themselves rather than just holiday gifts for others.
…adds to the evidence of a healthier consumer
Over the past several days, other positive consumer indicators have been announced. Last week, the Labor Department reportedThe Thompson Reuters/University of Michigan survey of consumer confidence hit a five-month high, although the release itself makes for pretty dismal reading. While respondents may be feeling more secure now than for almost half a year, they expect the unemployment rate to stay high and salary increases to stay low.
For a long time, I’ve been writing that I think that the recovery of the US economy this time around would follow the pattern of the rest of the world (that is, industry improves first, consumer second) rather than the shape it has invariably had in the past, at least throughout my investment career (that is, consumer first, industry second).
Recent data, and especially the NRF survey, seem to me to be in accord with my view. I read them as saying that finally, almost eighteen months after the economy low, the US consumer is beginning to perk up again.
Ex discount stores like WMT and TGT and home improvement outlets like HD and LOW, this suggests retailers with significant US exposure may be becoming more profitable than the consensus expects. Stocks whose main virtue is that the vast majority of their sales are outside the US, in contrast, may begin to lose their allure in Wall Street’s eyes.
It’s relatively easy to check any stock’s geographical revenue breakout (and maybe operating profit, as well, depending on the company). It should be in the firm’s annual 10-K filing with the SEC, available on the agency’s Edgar website.
A number of new ( to me, anyway) pieces of information about the current FBI/SEC insider trading investigation have emerged over the past few days. They are:
1. Many commentators have noted that the investigation resembles much more closely an FBI operation against organized crime than the “usual” kind of SEC action. The latter case typically has involved followup from red flags that emerge from SEC monitoring of trading patterns in individual stocks.
In this case, in contrast, the investigation has apparently been going on for three years, involves the FBI, includes wiretapping, and seeks criminal penalties.
No one I’m aware of has publicly drawn an obvious inference from this behavior, though. If the focus of this probe is organized criminal enterprises, it seems to me that the government will be seeking, or at least threatening to seek, penalties under the Racketeer Influenced and Corrupt Organizations (RICO) Act of 1970.
Under RICO, which requires that prosecutors establish a pattern (meaning at least two acts) of illegal activity, those found guilty can be sentenced to twenty years in prison for each racketeering act and fined $25,000. They can also be sued in civil court by those they have wronged for triple damages. Defendants’ assets can be frozen prior to trial (making it hard to pay your lawyer). The government’s reach is also extended to include all a person’s assets, not just those connected with the legal entity where a crime has occurred. In other words, if you’ve traded in insider information as an agent of a corporation or partnership, your house, your bank accounts, your art collection, your cars…are all at risk, not just corporate or partnership interests.
RICO has a history of being used in combatting financial markets crimes. Corrupt junk bond king Michael Milken was indicted under RICO in 1989. Drexel Burnham Lambert, the firm Milken worked for, was threatened with a RICO indictment as well. Both pled guilty to lesser charges.
I think RICO is the next shoe to drop.
2. Former SEC head, Harvey Pitt, has been making the rounds of financial TV shows giving his opinion about what the FBI/SEC are doing. The most interesting point he makes, I think, is on CNBC, where he points out that this investigation can’t involve a gray area that may, or may, not be insider trading. For the resources involved in this case, and given all the publicity the agencies have generated, it must concern clearly illegal activity. (Mr. Pitt says this around minute 3:10 of the CNBC interview.)
Points Mr. Pitt makes in other interviews: this action is focussed on hedge funds and comes as a result of authority explicitly granted to the SEC by the Dodd-Frank Act.
3. Don Ching Trang Chu, an employee at a California-based “expert network”
firm, Primary Global Research, was arrested by the FBI on November
24th and charged with conspiring to distribute inside information. The way Mr.
Chu’s business is described in the US Attorney’s press release and by
Bloomberg among others, it seems to have consisted in large part in finding
compliant middle-level employees in technology companies. These
employees would disclose company operating results, sometimes in great detail, to
hedge funds some hours in advance of their being made public in return for money.
In a narrow sense, for a long-term investor the question of whether a company’s
short-term results are 1% higher or lower than the Wall Street
consensus is of little consequence. The larger issue, however, is that the
perception that monied interests can rig the game in even one aspect can
undermine the public’s confidence in the markets–thereby delivering lower price
earnings multiples for everyone.
And of course, a sheriff must fear that if everyone believes he’s asleep on the job
he’ll be thrown out office and replaced.
This story will likely get more interesting as it unfolds.
Tiffany reported surprisingly good results for 3Q2010 before the market opening on Wall Street Wednesday morning. Earnings per share were $.46 vs. analysts’ consensus expectations of $.37. Sales were up 14% year on year, again higher than anticipated. Worldwide comparable store sales were up 7%. In contrast to 2Q2010, when TIF reported strong results but saw its stock fall 6% on the news, the shares rose over 5% in Wednesday trading.
The company reported that results improved month over month through the quarter, and that 4Q2010 sales growth “is exceeding our expectations” so far.
Based on the strength of the third quarter, TIF is raising full-year guidance to a range of $2.72-$2.77, compared with the previous range of $2.60-$2.65. In other words, the company is raising its fourth quarter guidance by $.03. The content and tone of the company’s remarks, however, suggest that this is a really conservative number.
Generally speaking, TIF’s third quarter followed the overall pattern of the second (see my post), only business was stronger in almost all areas.
Sales outside the US were higher than domestic sales for the first time. Given the much faster growth rate of the Pacific ex Japan and Europe for TIF, it may be a long time before US sales catch up, if they ever do.
Third quarter revenues break out as follows:
US $331.8 million, up 9% year on year, 49.7% of total sales
Japan $130.8 million, up 12%, 19.6%
Asia Pacific $127.1 million, up 24%, 19.1%
Europe $77.5 million, up 22%, 11.6%.
There were significant currency fluctuations during the quarter, with the yen rising and the euro falling. On a constant currency basis, sales in Japan would have been up only 2% and those in Europe would have been up by 29%.
Comparable store sales were up as follows:
Worldwide +9%, +7% on a constant currency basis
Americas +6%, +5%
Asia Pacific +15%, +11%
Japan +8%, -2%
Europe +16%, +24%
Let’s say that the current geographical growth rate continues at the same level for the next five years. Unlikely (something unexpected always happens), but if so, the company’s geographical sales breakout would look like this:
Asia Pacific 29%
In 2015, then, TIF would have about half its sales coming from Greater China and Europe, the US would remain a significant contributor, and Japan wold grow a little in absolute terms but shrink in relative size. Not a radical transformation from where the company is today, but a more than subtle shift in the sources of earnings.
details of the quarter
Sales were driven by higher prices rather than more units. Sales of items priced under $500, mostly silver ,were down year on year. In contrast, sales of items price over $500 were up 10%. Management said it sees this divergence as reflective of the shape of economic recovery in the US, not the effect of trading up. I presume this isn’t a social/political opinion, but rather a statement of what its customer analysis software is telling it–that wealthier Americans are feeling more comfortable, but that the less affluent are not.
A greater proportion of sales is coming from foreign tourists.
Year on year sales growth was +1% in August, +6% in September, +10% in October.
Comp sales in the flagship Fifth Avenue store were down 3%, but that’s likely because the Annual Blue Book sales event at the store was held in October last year vs. in November this year.
TIF is “pleased” with the early reception of its new leather goods line (I don’t know the company well enough to understand whether “pleased” is good or bad).
Half the sales come from Greater China. This half also has the highest growth. As in the US, year on year comparisons strengthened as the quarter progressed. Fine jewelry and engagement rings were especially strong.
Sales growth was driven both by increasing units sold and increasing prices. the UK and Continental Europe were equally good. There was no trend to monthly sales. Most business is done with local residents, but foreign tourist sales are beginning to increase as a percentage of the total.
Sales comparisons were increasingly favorable as the quarter progressed, with comps turning positive in October. Relatively flat sales in yen were a product of decreased units and higher prices.
Strength was in the higher end. Silver was good only in Europe and Asia Pacific.
The company continues to rehire staff laid off during the recession.
It will accelerate new store openings in 2011.
TIF has bought $72.8 million of its own stock, year to date, at an average price around $43. It has $329 million left to spend under the current board authorization, but will probably not spend the full amount this quarter (which says the company doesn’t see the stock at $60+ as a screaming buy).
The company will probably raise prices again early next fiscal year, to offset higher raw materials prices. Platinum and silver are the most important, with gold not so key. Labor costs are also under good control.
I should start by saying that I was struck when I wrote about TIF’s second quarter that it was as cheap as I’d ever seen it. So I ended up buying some in September.
TIF seems to me to be in an unusually advantageous position.
–It appeals to Europeans trading down and to aspirational buyers in emerging Asian economies.
–Although its main market, the US, is mature, TIF is a dominant force. The company benefits from consolidation of the industry, as well. And recession has accelerated the withdrawal of mom and pop jewelers from the market. I regard the introduction of leather as an important telltale that TIF thinks it needs new ways to spur growth domestically. If there’s any slowdown in the growth pace, I think it will be here.
–For investors worried about weak domestic growth and 10% unemployment as investment (not social) issues, TIF offers non-US exposure plus a domestic focus that is far away from the areas of greatest concern.
For me, today, the main issue with TIF is price. Let’s say TIF earns $2.85 this year and $3.40 (a stretch, I think) in 2011. And let’s say it deserves a 20x multiple. That would mean the stock could trade as high as $68 a share next spring. A 10% gain is nothing to sneeze at, but I think there must be better values around. As an owner, however, I have absolutely no reason to want to sell.
Today’s post will be short, since I’ve got a pretty full calendar of parade watching, turkey eating and football on TV.
dividend carry, a bit of arcana–but maybe important nonetheless
Back when dividend payments were a more significant part of total return, and of investor desires, than they have been for the past twenty years or so, market watchers occasionally remarked on the fact that some dividend-paying stocks “carried” part or all of their payout. That is, they did not decline on the day the stock started trading ex-dividend (meaning the seller is entitled to the dividend payment, not the buyer) by the full amount of a soon-to-be-made dividend payment.
This phenomenon may start to become important again, both because aging Baby Boomers are more interested in current income than they have been in the past, and because the dividend yield on the S&P 500 is higher today than it has been (except at the bottom in bear markets) for a quarter century.
A recent example:
On November 2nd, WYNN declared an $8 per share dividend. It’s payable on December 7th, to shareholders of record on November 23rd. The stock started trading ex dividend on November 19th. (The difference between the last two dates is to allow for the lag between the trade date, when the bargain is struck, and the settlement date, when the money changes hands and the new owner officially takes possession of the stock.)
WYNN closed at $108.99 on November 18th. That’s the equivalent of $100.99, ex dividend. On November 19th, the major stock market indices were flat. But WYNN opened at $101.33, traded in a range between $101.25 and $103.70, and closed at $102.99, up $2, or just a tad under 2%, on the day. The stock never touched the theoretical ex dividend price.
Why does something like this happen? I don’t know…but it does. I haven’t studied the phenomenon closely, but my impression is that this happens mostly with better quality companies. You might argue that the market is super-efficient, realizes that excess cash is like a dead weight and concludes that the stock is more attractive after making the payout and, so to speak, unloading extra baggage. On the other hand, you might suspect the unusual support comes from inattentive investors who don’t realize that the stock has gone ex, think the stock has just made a random movement down, and swoop in to pick up a “bargain.”
This is not to say that dividend-paying stocks like this will outperform the averages. But the returns may be a few percentage points better than what you could reasonably expect, given the risk inherent in owning the issue and its growth prospects.
You might check my “carry” thesis by looking at the price action of comparable stocks on the same day, last Friday in the case of WYNN, to see if they too had similar better-than-the-market performance, even though they didn’t go ex dividend. The closest matches for WYNN are MGM and LVS. Both went up on the 19th, MGM by less than WYNN, LVS by more.
My view is that although all three have operations in both Las Vegas and Macau they’re not very similar companies at all. LVS and MGM have much higher financial leverage than WYNN. And LVS has its spectacular success in Singapore. But I think the best way to see the differences is to look at the stocks’ performances from their peak levels in 2007 and from the market bottom in 2009.
From the bottom, LVS is up about 35x, WYNN only about 6x and MGM less than that. But WYNN is now around 75% of its 2007 peak, while LVS is less than a third of the way back and MGM is about a tenth. I don;t think comparing the price action of WYNN, MGM and LVS on the 19th, although the obvious first thing to do, tells you much at all.
In yesterday’s post, I wrote about what insider trading and expert networks are.
Why have expert networks flowered over the past decade and been especially favored by hedge funds?
When I started working in the stock market in 1978, it was common for both brokerage houses and large institutional investors in the US to have extensive staffs of analysts.
As the sell side continued to rebuild itself and improve its analytic capabilities after the 1973-74 recession, buy side firms worked out that they could save money by shrinking their own staffs and rely on brokerage house research instead. Better still, from their point of view, they could pay for access to the brokers’ analysts through commission dollars (“soft dollars”), a tab picked up by money management clients, rather than paying analysts’ salaries out of the management fees clients paid them.
Control of brokerage firms gradually passed into the hands of traders, who regard research as a cost center that produces no profits. They did what seemed the obvious thing to do and began to lay off analysts. During the Great Recession of 2008-2009 the steady trickle of layoffs became a torrent–and gutted the major brokers’ analysis capabilities, particularly in equities.
The professional disease of analysts is that they analyze everything, including their own jobs. Senior people have long known that they’re vulnerable in a downturn, especially since they all are compelled to have assistants who earn a small fraction of what they do–and who can sub for them in a pinch. Their response? –in many cases, the senior people hire assistants who look good in business attire and can present well to clients, but who have limited analytic abilities. As far as I can see, this defense mechanism protected no one during the fierce downturn recently ended. It may be harsh to say, but “place holder” assistants may be all that’s left in some research departments.
If the cupboard is pretty bare in brokerage house research departments, do hedge funds build their own?
Some have. But–and this could be nothing by my own bias–a lot of hedge funds are run by former brokerage house bond traders. Traders and analysts are like the athletes and the nerds in high school. Very different mindsets. So hedge funds that are run by traders, and that have a trading orientation, don’t have the temperament or the skills, in my opinion, to build research functions of their own. They also want information that’s focused strongly on the very short term. (Is it a coincidence that the subjects of the recent FBi raids are all run by former bond traders?)
They can’t get it from brokers. They can get it from independent boutique analysts. But were better to get information about, say, the upcoming quarter for Cisco than from a Cisco employee visiting as part of an expert network.
I wrote yesterday about the immense amount of information publicly available to a securities analyst. In the US, companies are required to make extensive SEC filings, in which they report on the competitive environment, the course of their own business and the state of their finances. Some firms hold annual analysts’ and reporters’ meetings–sometimes lasting several days–in which they try to explain their firms in greater detail. There are trade shows, brokerage house conferences on various industries and–in many cases–specialized blogs that discuss industries and firms. Publicly traded suppliers, customers and the firms themselves hold quarterly conference calls, in which they discuss their industries and their results. The internet allows you to reach competitor firms around the world.
Companies also have investor relations and media departments that provide even more information for those who care to call. Many times these departments also organize periodic trips to major investment centers to meet with large shareholders and/or with large institutional investors. The talking points for these trips are scripted in advance. My experience is that the company representatives attempt to create the impression that questioners in the audience have penetrating insights and are forcing the company to answer tough, and unusual, questions. And people on my side of the table are usually more than happy to believe that this is true. But in reality the companies tell basically the same things to everyone.
Still, the idea that anyone who obtains inside information is “infected” by it and becomes a temporary or constructive insider as a result has made profound changes, I think, in the way companies and analysts interact.
Let me offer two examples:
1. In my early years, I ended up covering a lot of smaller, semi-broken companies that senior analysts didn’t want. It’t actually a great way to learn. Anyway, I had been talking regularly for about a year with the CEO of a tiny consumer firm that was flirting with bankruptcy. This CEO was understandably downbeat and our talks were rather depressing.
Then rumors began to circulate that a Japanese firm was interested in buying the firm at a high price (in reality, anything greater than zero would have been a high price). I called the CEO a couple of days later to prepare for my next report. He was very cheerful, didn’t have a care in the world, actually joked his way through my questions. I didn’t need to ask about the potential takeover. His whole demeanor told me that the rumors were true.
Did I have inside information? Twenty years ago, the answer would have been no. I was just a skilled interviewer drawing inferences from the conversation. Today, I don’t know. I suspect the answer is yes.
2. I’m in a breakout session with the CFO of a company which has just presented at a brokerage house conference and is answering follow-up questions from analysts in a smaller room. Someone raises his hand and says that for a number of reasons he thinks this quarter the firm will miss the earnings number it has guided analysts to. He requests a comment. Most people know the questioner–or at least can read his name badge. He comes from a hedge fund that is rumored to be short the company’s stock.
The CFO clears his throat, takes a sip of water and says there’s no reason to think the firm won’t easily make its guidance.
I’ve known the CFO for a few years. He only clears his throat and sips when he’s getting ready to say something that’s technically true, but is misleading –in other words, a lie.
Do I have inside information. Again, years ago the answer would have been no. Today, I’m not sure. If this were a private meeting with the CFO, I think it’s likely that I’ve got inside information. But is a breakout session public disclosure? Does it make a difference if the session is televised, so everyone can see what the CFO is doing?
My uncertainty changes my behavior. How?
I probably no longer want a private meeting with top management of a company. I probably don’t want the company to comment on my earnings estimates, or to give any indication that a non-consensus estimate I may have could be right.
I have to rely more on my independent judgment. I want to be wary of any interaction with company management. I don’t want any “help” with my estimates (not that I need any).
This is actually good news for individual investors, because the playing field between them and professional analysts has been leveled significantly.
News reports over the past day or indicate we may be in the early days of what could prove a widespread regulatory crackdown on insider trading. The FBI has raided the offices of several hedge funds, a number linked with SAC Capital. A west coast independent technology analyst has publicized a failed attempt by the federal police agency to trade more lenient treatment for alleged offenses in return for recording (presumably incriminating) conversations with a client, hedge fund SAC Capital. “If felt like a street mugging,” he’s quoted as saying. The analyst reported this encounter by email to his customers, instead. They, in true Wall Street fashion, immediately ceased doing business with him.
All this prompts me to write about four loosely linked topics: insider trading, expert networks, hedge fund information gathering and issues that the fuzzy nature of what constitutes insider trading create for professional securities analysts.
Two posts, today and tomorrow.
First, a pedantic point. Insiders, like the top managements of publicly traded companies, can trade legally. There are, however, clear restrictions on what they can do and when.
But that’s not what people usually mean when they talk about insider trading. They’re referring to illegal insider trading. There’s actually a good, if a bit dated, survey of insider trading regulations and their purpose on the SEC website.
Here’s my take on what insider trading is. Remember, though, that despite the fact I’ve sat through 25 years+ of mandatory compliance training that included a heavy dose of insider trading information, I’m not a lawyer. As you’ll see below, this can be a pretty fuzzy concept, with lots of gray area, border line cases.
The standard definition of insider trading is that it is based on material, non-public information. Doing so is illegal for two reasons:
1. It’s like stealing. It’s taking information that is supposed to be used only for a corporate purpose and using it for personal benefit instead. For the corporate employee who has such information, trading on it is a violation of the duty of trust and care he is expected to have for his employer.
2. It’s like fraud. That’s because the inside information trader is taking advantage of the fact he knows the person on the other side of the trade can’t possibly be aware of the material information he is acting on.
That’s straightforward enough. But inside information also has a viral or fungal quality to it. Today’s rules maintain that anyone, whether employee of the company involved or not, becomes a “temporary” or “constructive” insider the minute he reads/hears the information. This means he has the same fiduciary obligation that a company employee would have. He can’t trade on the information, even if he had figured out 95% of it on his own already.
It also means that the last thing any securities analyst worth his salt wants is inside information. It’s like a runner getting a knee injury. It puts him out of the game and on the sidelines.
Another modification to the rules concerns selective disclosure, which under Regulation FD (Fair Disclosure) is no longer allowed. At one time, companies routinely disclosed information to sell side analysts but not to shareholders or their representatives. Or they gave extra information to favored institutional shareholders in private meetings. I remember vividly once being asked to leave a briefing by Sony about its video game strategy, even though I was representing owners of the company’s stock, because I didn’t work for an investment bank. That’s crazy, to tell company secrets to strangers but not the owners, but it happened. (I refused, by the way, and wasn’t thrown out.)
Analysts and expert networks are different.
Most sell side analysts specialize in a single industry. Their buy side counterparts usually cover several industries, sometimes closely related, sometimes not. Both kinds read industry literature, attend trade shows, go to company analyst days (where top management explains how the company in question makes its money and where it stands among its competitors), read company SEC filings, listen to earnings conference calls. They also produce detailed spreadsheets modeling company operations, hoping to project future earnings with a high degree of accuracy. Gradually, even if they have no prior industry background, they become extremely knowledgeable about the areas they cover.
Expert networks, in contrast, are collections of industry consultants who are assembled by a middleman and whose services–usually a one- or two-hour meeting–are offered to professional investors for a fee, most often paid in soft dollars.
Say a company wants to find out about communication networking equipment and doesn’t have an experienced analyst who covers the area. Or maybe the company does but a portfolio manager wants an especially detailed or technical question answered. Then he calls the expert network organizer to say what he needs. What he probably gets is a middle-level manager or technical employee from, say, Cisco, who is willing to talk for two hours for $1,000 (the payment to the network organizer may be $2.000-$3,000).
The legal issue is that the guy from Cisco may have no idea how much of what he knows is inside information. So the result of the meeting may be that inside information is passed from the expert network consultant to the investor. If so, it’s the functional equivalent of whacking every investor at the meeting in the knee with a crowbar. What the SEC is investigating is whether obtaining inside information is the intent of the meeting and, in particular, if some hedge funds use these networks as conduits to get illegal information that they can trade on.
Back to analysts, for a minute. I don’t John Kinnucan, the analyst the FBI tried to wire, and I’ve never seen his work. The Wall Street Journal description of his business suggests he operates in a gray area. According to the article, his specialty is “channel checks.” That is, he schmoozes with tech company salesmen and with distributors, to see what’s selling and what isn’t. He then synthesizes the information he gets and passes it on to clients. It’s also possible that clients ask for specific items of information–I don’t know whether they do or not, but I think it’s a reasonable supposition that they do.
The big question is whether Mr. Kinnucan’s sources of information tell him very specific things that they have an obligation not to reveal to people outside the company. In other words, is this activity like #1 above, a use of confidential company information for personal benefit. If so, Mr. Kinnucan and any of his clients who receive his reports are infected. They’re insiders and can’t trade on the information. The FBI appear to have waned Mr. Kinnucan’s taped conversations with SAC Capital to build/buttress an insider trading case against SEC. So they must either think, or hope, that the information in the reports do contain inside information.
That’s it for today. Tomorrow: why I think hedge funds use expert networks and highly specialized analysts like Mr. Kinnucan; and practical issues for any securities analyst.