Monthly Archives: October 2013

Washington crisis over …what now?

October 17, 2013 By in Current Market Thoughts, Portfolio management, Strategy Tags: , , , , , , Leave a comment

Federal government workers in the eastern US are on their way beck to work as I’m writing this.  The debt ceiling crisis has been postponed for several months.

What happens next on Wall Street?

On the one hand (the bigger one), I think investors will also go back to their “normal” work.  That is, they’ll:

–continue to absorb information from the 3Q13 earnings season and company guidance about 4Q13 prospects, and

–continue to form expectations for the global economy in 2014.

They’ll reshape their portfolios in response to news.

Here’s what I expect–

Prior to the shutdown, the US economy appeared to be gradually picking up steam.  My guess is that steady progress will resume, after a short air pocket caused by the layoff without pay of government workers.

As for 2014, it will probably be a stronger year for the global economy than this one:

–the EU continues to give signs that its economies have bottomed and are trundling, albeit slowly, down the road to recovery

–China is trending up again, possibly more quickly than the consensus expects

–ex more destructive emanations from Washington, the US will likely continue to have the strongest growth in the developed world.

This analysis suggests that the same equity portfolio structure that produced market-beating results in 2013 should be good for 2014, as well.

On the other hand,

there’s the question of possible stock market fallout from Washington’s continuing dysfunction.  This could come in one of two ways:  investors might demand a higher risk premium for investing in the US than they have previously; or Washington might, by accident or design, do something that further damages the country’s economic prospects.

Who knows?  I certainly don’t   …nor, in my opinion, does anyone else.  Nevertheless, this is an issue.

In situations like this, what professionals do is to try to construct a portfolio where the answer to an imponderable question is unimportant.  This is not a hedge.  It’s an attempt to find stocks where the answer to a thorny question makes little difference.

For example, an investor can:

–rotate European holdings away from multinationals with US exposure toward domestic-oriented firms (something one would probably do anyway)

–shift away from domestic names in the US toward companies with EU or Pacific ex Japan exposure

–get China exposure through Hong Kong stocks instead of US ones

–opt for secular growth companies rather than business cycle-sensitive ones.

I think professionals will do all these things.

In addition, foreign pms will probably opt to hold less in the US.  Domestic US managers may do so as well–although this would be an active portfolio response to the question of the future tone of Washington policy, rather than simply a way to make it as irrelevant as possible.

The net result will be to take some of the shine off US equities.  They’ll still go up, in my view, but not as much as if the government shutdown had never happened.

 

 

3Q13 earnings for Intel (INTC): the wait continues

October 16, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , Leave a comment

I’m on the road today, so this will be brief.

Yesterday after the market close, INTC reported earnings for 3Q13.  EPS were $.58/share, considerably above the Wall Street consensus of $.53.  Initially, the stock was up by around 2% in the aftermarket on this news.  Then it reversed course and lost about 2%.  Symmetrical, but not wonderful.

As I see it, the news can be divided into two halves–current market conditions and INTC’s future viability as a chip firm.

The near-term bucket is looking good.

–The high speed and cloud server businesses continue to boom, and now make up at least half of INTC’s total server revenues.

–Regular old corporate servers are even starting to pick up.

–The middlemen and OEMs that INTC sells its PC chips to are slowly starting to build their inventories in response to a bottoming of the PC market in the US and the EU.  Stocks, however, still remain smaller than normal, so there’s more improvement to come.

–More tablets will be appearing over the coming weeks with INTC chips inside.

4Q13 eps, traditionally a big quarter for INTC on holiday sales, will be flattish with 3Q13, on revenues up only slightly, quarter-on-quarter.

The future. on the other hand, has once again been pushed out–this time for another year, until 2015.

INTC’s industry-leading 14 nanometer chips have been delayed by a manufacturing glitch for three months until January.  So their higher speed and lower power use won’t be available during this holiday season.  To my mind, this is not a big deal.  On the other hand, during the conference call that accompanied the earnings announcement, CEO Brian Krzanich said he doesn’t think INTC can make its manufacturing operations as flexible as they need to be to respond to customer needs for another year to eighteen months.

This contrasts with the comments of former CEO Paul Otellini, for whom full competitiveness with rival chipmaker ARM Holdings was always just a quarter or two around the corner.

In hindsight, Otellini had a habit of being too optimistic.  In contrast, Krzanich, as a new CEO, has no incentive to make promises he can’t keep.  His best course of action is to underpromise and overdeliver.

The bottom line, however, is that the turnaround holders like me are hoping for has once again been pushed out.  That’s why the stock is down in the pre-market this morning, though not by as much as it was last night.

I’m content to hold and collect the dividend.

China calls for a “de-Americanized” world

October 15, 2013 By in China, currency effects, economics, reserve currency, Strategy Tags: , , , , , , , , Leave a comment

China editorializes

Over the weekend, Xinhua, the official Chinese news agency, wrote an editorial, sparked by Beijing’s worry about possible US debt default, but also addressing its general concerns about the military, political and economic dominance of the US in the world.

Xinhua says:

” instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies”

Therefore, fundamental change is needed.  Along with renewed respect for international law and increasing reliance on the UN, 

“What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”

my take

These sentiments aren’t exactly new.

Internally, the faction of the Chinese Communist Party that controls the investment of the country’s gigantic accumulated current account surpluses has got to be very worried that it will take the political fall for any loss on China’s Treasury bond holdings if the US defaults.  That’s what political infighting is all about.  And loss could come either through rising interest rates or a decline in the value of the dollar.  Important, then, to get the story out that the real villain is, as usual, the US.

At the same time, the editorial underlines the immense power that the US wields because the dollar is the world’s  de facto reserve currency.  For the US, it’s like owning the bank and being able to write/cash a check to yourself whenever you please.  You also get to defuse internal economic pressures by exporting them to the rest of the world through the currency.  

The US won’t lose this central role in world commerce any time soon.  However, an unintended consequence of the current Washington rhetoric of embracing default as a political tool–and the prospect of more of the same to come–may be a serious China-led effort to decouple from the dollar.  

Potentially very damaging to the US   …but a long time away.  

The imponderable here is the discounting mechanism in the financial markets.  Were large international banks and foreign government managers of their countries’ financial reserves to sense the possibility that a move away from the dollar might actually happen, their defensive measures (selling the dollar) could come very far in advance of the facts.  In other words, a move away from the dollar could snowball.

As investors, I think we have to be concerned that the role of the dollar as world reserve currency may not be as secure as the consensus thinks.  Personally, I’m a long way from acting on this possibility.  But it’s a lot higher up on my list of worries today than it was a month or two ago.

 

negotiating tactics

October 14, 2013 By in Current Market Thoughts Tags: Leave a comment

Early in my career as a global manager, the CEO of the Japanese company Casio came to visit.  That was during the endaka (rising yen) period of the 1980s, so a weak-yen beneficiary like Casio didn’t have a particularly compelling story.  But I was very interested in hearing about the company’s experience establishing manufacturing operations in China.

When I asked the chairman, he made a sour face (not what I had expected).  He said that the Chinese government was very difficult to negotiate with.  Discussions took a long time, so that the company had an increasingly large investment in their success.  An agreement would finally be reached and a signing date set for contracts.  On that day, after all parties had sat down for what Casio expected to be a purely ritual occasion, Beijing would reopen negotiations and demand further concessions (the Chinese side might also contend that these were due as reparations for WWII war crimes like those in Nanjing, a particular vulnerability of  Japanese on that vintage).

Even though both labor costs and capital costs were lower than in Japan (another aside:  this almost never happens), Casio was already concluding it couldn’t make a profit in China.

Relevance?

The tactic of striking a deal and then reopening negotiations isn’t a very popular one. And, in my experience, it’s not commonly employed when companies negotiate.   The one who employs it shatters any illusion the other might be developing that he cares about either the venture’s success or the other’s welfare.  There also overtones of not wanting or expecting to do business with the other again–or, what may amount to the same thing, that the one side will always have the upper hand, and never need a favor from the other.

 

What reminded me of the Casio visit was Senator McCain’s complaint on Sunday that both parties had reached an agreement last Thursday to end the government shutdown and raise the debt ceiling–but that the administration had demanded more concessions after an NBC/Wall Street Journal poll was released showing Republicans falling to a twenty-year low in public esteem.  If press reports are accurate, this is the second time the administration has employed this tactic.

As I’ve written before, I don’t like talking about politics.  The investment conclusion I draw from Washington’s bickering is that both sides think the other will be swept out in the next election.  At least until then we can expect recurring confrontations, with the trading opportunities that they bring.  Yes, this means potential profits.  But it also means ulcers.  So the behavior diminishes the attractiveness–and lowers the potential returns–of US securities markets.

restaurants vs. supermarkets: reversal of form?

October 11, 2013 By in Consumer Staples, Current Market Thoughts, Entertainment, Industry Analysis, Lodging Tags: , , , , , , , Leave a comment

trend reversals

The government shutdown means that all the government databases are unavailable.  That’s good news for me   …and bad.  It means I can’t get precise data.  On the other hand, I feel justified in winging it.

I’ve been thinking a lot lately about Millennials vs. Baby Boomers, probably because I’m one and my kids are the other.  I’ve also been thinking about trend reversals, mostly because I believe we’re in a time when a lot of this is happening.  There are always to make money from recognizing trend reversals early.

restaurants vs. supermarkets

I remember seeing a piece of truly excellent sell-side research about ten years ago that documented the changes in American eating habits over a 30-40-year period.  The essence was that through good times and bad Americans were spending an ever-increasing proportion of their food budgets on meals away from home (eating in restaurants + take out).  Not only that, but the extra expense of restaurant meals vs. home cooking had been on a steady decline from, say, a 40% premium over cooking at home two decades earlier to 20% at the time of the report.

The conclusion:  a MEGATREND favoring restaurants over supermarkets (which were having competitive problems with Wal-Mart, anyway).  At that time, home cooking represented just over half of what consumers were spending on food.  The restaurant share was inching up by 0.5% – 1.0% annually.  NO END IN SIGHT!

Well, the Great Recession has changed that.  Over the past few years, eating out has been falling as a percentage of consumer spending on food.

Details:

–everyone outside the top 20% by income has cut back on restaurants a lot in order to save money– and by enough to derail the long-lasting pro-restaurant trend

–Millennials have not only cut back, but they’ve aggressively traded down to less expensive eateries

–seventy-somethings have changed their behavior the least

I think there are two related reasons for the cutback:

–what economists call a substitution effect, as consumers rejigger their spending to maintain, or enhance, their lifestyles in a world without pay increases and where interest rates are ultra-low, and

–workers realize they can’t get sick if they want to retain their jobs, so they’re eating healthier.

I’m not sure how much of this is already baked in the stock price cake, as it were.  But I think it’s worth taking a look at eat-at-home beneficiaries to check.