Monthly Archives: April 2013

Alcoa (AA) opens the 1Q13 earnings report season

April 9, 2013 By in Capital-intensive firms, earnings conference calls, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , , , , Leave a comment

earnings season again

It’s quarterly earnings season again, the time when every growth stock investor gets a report card on whether he’s picked fast growers or not.

…as usual, AA is first out of the blocks, reporting after yesterday’s New York close.

…as usual, talking heads reach into their bags of clichés and dub AA as a bellwether, or setter of the overall market trend.

…as usual,  the media will interview metals analysts who will “confirm’ the bellwether status of AA.  But, hey, they make their living by having people pay them for their expert knowledge of aluminum.  What else are they supposed to say?   …that it’s a niche industry you can easily live without?

…as usual, the reality for AA is far different, as even a casual glance at a stock chart of AA shares over the past decade would reveal.

the AA report

Alcoa earned $.11 a share in the March quarter, up from $.06 in the year ago period.

–Severe production cutbacks by aluminum producers have brought the supply of aluminum into better balance with demand and improved pricing.

–China’s use of aluminum will grow by around 10% this year; Europe will be down mildly, with beverage cans showing the only plus sign; the US will be up a tiny bit.

–Aerospace will grow by 10% or so globally, non-residential construction by half that.  Everything else–motor vehicles, beverage cans, turbines and housing– is in the +2% – +3% range.

Analysts think AA will post full-year earnings of around $.50 a share this year and $.85 a share next.

All in all, a good report by a very well-managed company in a tough industry.  If the 2014 number is even close to correct, the stock may be mildly undervalued, in my view.

The report also shows that things are ok, but not great, in the industrial sector.  But, to my mind, the report illustrates, too, why metals, and aluminum in particular, are not the place to be overweight in a portfolio right now.

the bellwether thing?

Let’s hope not.

Just look at a chart of AA.  At the top of the market–and of the housing construction boom–in 2007, AA was a $48 stock.  Today, with the S&P reaching new all-time highs, AA is $8 and change.  In fact, except for a brief period in 2007-08, AA has been a serial underperformer for over a decade.

Why?

AA has a highly skilled management, but it’s in a highly business cycle-sensitive industry.  Like almost any mining-based activity, it’s also subject to extended periods of depressed prices as gigantic new mining/fabrication projects–years and years in the planning–get opened, usually just as the business cycle is turning down.

A generation ago, conventional wisdom was that world GDP grew in lockstep with the availability of base metals supplies.  In those days, AA was indeed a bellwether.  But the rise of the knowledge worker, to say nothing of the internet, shows how wrong that thinking has proved to be.

 

Stockton, CA–a courtroom battle with uncertain (but maybe big) consequences

April 8, 2013 By in economics Tags: , , , , Leave a comment

Stockton, CA

Stockton, California is a town of just under 300,000 citizens, located about 80 miles east of San Francisco.  Stockton has recently achieved two unenviable distinctions:

—it’s a repeat “winner” of the Forbes prize as the “most miserable city” in the US, although it has fallen/improved to #8 in this year’s poll (in case you’re interested, Detroit is the current champ; Modesto has replaced Stockton as #worst in CA).

—it’s also the largest US city (so far) to have filed for bankruptcy.  Stockton did last year to deal with fiscal troubles that a welter of bad decisions it made during the housing bubble caused.

the bankruptcy:  

–creditors

The city has two big creditors:

–the CalPERS state pension system for government workers, to which it owes $900 million or so; and

–municipal bondholders, who own $600+ million of Stockton paper.  Of that, about a quarter is insured, meaning the insurance companies–not bondholders–are on the hook for any losses.

–last week

The bond insurers, along with Franklin Advisors and Wells Fargo representing bondholders, went to court to try to prevent Stockton from entering bankruptcy.  They argued two points:

1.  that Stockton was not really insolvent, and

2.  that the city’s proposed plan of adjustment discriminates unfairly against bondholders because it leaves its debt to CalPERS untouched, meaning the bondholders and insurers would absorb 100% of any losses.

Last week a US court said Stockton could declare bankruptcy.  Judge Christopher Klein ruled that:

1.  Stockton is insolvent, and

2.  the discrimination issue doesn’t need to be addressed before Stockton can enter bankruptcy.  It does, however, need to be dealt it can exit bankruptcy.  Judge Klein wrote, “And that problem is probably going to require me to get down into the nitty-gritty of the CalPERS situation. And I, at this point, have no clue how that’s going to come out.”

–what I find worth watching

To me, the biggest issues are:

–whether government employee healthcare or retirement benefits are subject to renegotiation in bankruptcy;

–whether any court action hinges on the judge’s description of Stockton benefits as overly generous and subject to upward manipulation through “pension spiking,” or whether it will have more general application, and

–whether CalPERS will be forced to share in any pain.

The whole question of guaranteed lifetime benefits–something that has virtually ceased to exist in the corporate world in the US–is a highly emotionally and politically charged one, as you can see from just about any internet discussion you find about Stockton.  The Stockton case could have an outsized ripple effect on public debate.   It may also end up influencing Californians about where they choose to live and work.

I don’t think it’s yet clear what the real position of the Stockton city government is on after-the-fact reductions in employee benefits is.  If you hope to be reelected, it would be much better to be “forced” by a court to make cuts than to volunteer to make them yourself.  CalPERS has already made it clear, though, that it regards the $900 million Stockton pension shortfall to be solely the city’s problem.

This case will also doubtless also have consequences in the arcane world of municipal bond insurance, where premiums are very small because claims almost never happen.  A large loss from Stockton bonds may dampen insurance companies’ enthusiasm for guaranteeing the offerings of iffier credits.

the March 2013 Employment Situation Report

April 5, 2013 By in Constructing a Portfolio, Current Market Thoughts, economics, employment, Employment Situation report Tags: , , , , , , , , , Leave a comment

the report

At 8:30 edt this morning, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation Report for March.

Job gains for March came in at +88,000 net new positions, a sharp decline from the +236,000 new jobs reported for February.  The figure was also considerably below the consensus of private economic forecasters, +190,000  …as well as of the more bearish of them, who were suggesting +150,000 was more likely.

The private sector gained +95,000 jobs; government subtracted -7,000, due to a loss of -12,000 postal workers.

Construction and retail were the weakest areas month on month, suggesting that cold weather may have had a hand in how the numbers played out.  Still, the March jobs figure was surprisingly bad.

What makes the situation more curious is

the revisions

Not all the government survey respondents get their figures in on time.  So each monthly ES is revised twice, once in each of the following two months.  In contrast to the March ES numbers, the revisions for January and February are both strongly positive.  

–The February figure rises from +236,000 to +268,000, on the addition of +8,000 private sector jobs and +24,000 in government.

–The January figure goes from +119,000 to +148,000, on the addition of +24,000 new private sector jobs plus fewer layoffs in government.

Together, the revisions boost job growth by +61,000 new jobs.

what’s going on?

No one really knows.

The March figures might not reflect the true job situation, either because of the weather or because of some quirk of the seasonal adjusting the BLS does to the numbers.  It may also be that strong construction and retail hiring earlier in the year “stole” some jobs from March.

Or it could be that something happened to the economy in March that caused employers to rein in hiring.  The most benign explanation I can think in this vein is fear of the sequester.  In one sense, this really shouldn’t be the case, since the sequester is only about 1/7th the size of the fiscal cliff–and employers were hiring at a +200,000 monthly clip as the “cliff” approached.  On the other hand, maybe the sequester is realer than the cliff ever was.  And all the noise coming from both  political parties suggested that Washington might, instead of trying to minimize the economic minus the sequester will cause, try to make the sequester as harmful as possible, just to score bureaucratic/partisan points.

If I had to guess, and I don’t want to, I’d say that the real job gains are around +150,000 and that we’ll see in a month or two that temporary statistical noise is obscuring this.

what’s an equity investor to do?

One bad jobs number doesn’t change the economic recovery story for the US.  In fact, if we take the +88,000 as the unvarnished truth, it reinforces my strategy of staying away for now from the most highly cyclical sectors, like Materials.

For what it’s worth, I have two rules for days like today, which, as I’m writing, is showing some stomach-churning falls in individual stocks:

1.  don’t do something crazy that I’ll regret in two or three months, and

2.  try to upgrade the portfolio.

On down days with wide swings like we’ve been having the past week or so, typically the stocks that have been showing the greatest relative price strength–and which have the best growth prospects– tend to go down the most.  That’s most often solely because they’ve produced the greatest gains.

The only ones that don’t go down are the doggy ones that haven’t gone up–and which will presumably be left behind in the dust again when the market resumes its rise.  A day like this gives all of us a chance to trade in that loser we’ve irrationally been holding onto (please don’t tell me there aren’t any in your portfolio–that just means you aren’t looking hard enough) for a better model at a more favorable price.

Aereo’s courtroom win–what it means

April 4, 2013 By in Aereo, Current Market Thoughts, Industry Analysis, internet, Stock ideas Tags: , , , , , , , Leave a comment

Aereo?

It’s a company in the Barry Diller stable.   Aereo has assembled a ton of tiny little over-the-air television antennas deep in the bowels of Brooklyn, each tagged with the name of the individual customer Aereo rents it to.  The antennas capture the signals of the traditional broadcasters that use public airwaves.  Aereo repackages these signals, adds pause, rewind and record features–and then streams them to each renter’s computer, tablet, smartphone, Apple TV or Roku box.

(For what it’s worth, in addition to all the over-the-air channels, Aereo tosses in Bloomberg TV.)

The service is currently available in New York City, Long Island, plus seven NY counties in/around the Hudson Valley. Thirteen counties in New Jersey qualify as well, as do Fairfield County in Connecticut and Pike County in Pennsylvania.

how much does it cost?

You can “try” Aereo for an hour a day, with (so far) no limitations, for free.  No DVR, though.

You can buy a Day Pass for $1.  That gets you 24 continuous hours of viewing and three hours of recording (lasts ten days).

You can subscribe for $8 a month and get unlimited viewing + 20 hours of DVR space.  $12 a month gets you 40 hours of DVRing.  You can also plunk down $80 for a year’s worth of watching–plus three free months.

the lawsuit

All the big TV networks have sued Aereo, maintaining that the firm is making an unauthorized public transmission of their content (translation: Aereo isn’t paying retransmission fees the way cable/satellite companies do).  Aereo says its service is no different from a guy putting an old-fashioned TV antenna on his roof–except that in this case it’s super-tiny and lives in the lower intestinal tract of Kings County.

On Monday, an appeals court reaffirmed a lower court ruling that Aereo is right and that the networks are unlikely to win in a trial.  So the court isn’t going to shut the service down, like the networks wanted.

The networks say they’re going to bring the case to trial anyway.  Even if they do, and eventually prevail, that will be years–and lots of potential damage–down the road.

my take

1.  After its court wins, Aereo is going to expand its service to 22 new cities (the list is on the Aereo blog).  To me, this means that Aereo is soon going to be more than a minor annoyance.  (Note, however, that there are no plans to set foot in California–perhaps because a court there has already shut down an Aereo-like service, according to the New York Times.)

Aereo has already spawned imitators, so the phenomenon could spread much faster than anyone now suspects.

There’s also nothing to prevent unaffiliated content providers from selling their offerings to Aereo, either (but don’t hold your breath for network-controlled programmers like ESPN).  So Aereo-like services could turn out to be bigger than anyone now thinks.

2.  All the cord-cutters in my family have line-of-sight access to digital broadcast sources–something that’s not common in New York.  So $8 a month is a lot more expensive for us than buying the $35 digital antennas we hook up to our TVs.  But we’re unusually lucky.

Of course, an hour a day of live TV may be enough for many folks, supplemented by the occasional $1 to view, say, important sports events.

And Aereo is an awful lot cheaper than getting the lowest-level cable service.

So Aereo may have a surprisingly large impact on the cord-cutting decision.

3.  If I were a cable company paying retransmission fees to the networks, I’d certainly want to negotiate them down.  After all, I could always try to cut a deal with Aereo if I didn’t get a favorable response.

4.  Original content, à la Netflix, on Aereo?  …shouldn’t be too hard for Diller, who ran Paramount and built Fox Broadcasting.

investment significance

If I didn’t have my trusty digital antenna, I’d be an Aereo customer today.

If I could invest in Aereo today on reasonable terms, I’m pretty sure I’d do it.

Buy into an Aereo IPO?  –harder to say, since if the service gets rolling, the offering price might be crazy-high–even Zynga- or Groupon-high (convulsive trembling!).

At the very least, Aereo may well be the stone that starts the avalanche–and which forces the network broadcasters and cable/satellite companies to scramble to avoid/minimize damage, if they can.

I think it’s an important phenomenon to monitor.

Macau gambling and the Chinese economy

April 3, 2013 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Industry Analysis, Recent Market Action Tags: , , , , , , , , 1 Comment

March 2013 Macau gaming results

The Macau Gaming Inspection and Coordination Bureau has just released its report on the gambling take of casinos in the SAR during March 2013.  The figure is eye-popping.  Last month gamblers exited Macau;s gambling palaces with their wallets lighter by 31.3 billion patacas (US$3.9 billion).

how good is that?

–P31.3 billion is an all-time monthly record for casino win in Macau.

–It represents a 25.4% improvement over the comparable period of 2012.

–The year-on-year gain is the highest for the SAR since January 2012, after which the Chinese economy–and the Macau casinos–began to falter.

–March is also up 15%+ vs. February, which runs contrary to Macau’s (admittedly short) pattern of flattish month-on-month comparisons in the first quarter.

winners?

This is great for the Macau casino industry, and especially for the firms that have recently added capacity, mostly in Cotai, to accommodate extra gamblers.

At the same time, the Macau gambling results give us a good idea about how well-to-do Chinese citizens feel about their economy, their personal earning prospects and their degree of comfort with the newly-installed government.  It’s a solid thumbs-up on all counts.

The figures also suggest that in its newly-launched anti-corruption, anti-ostentation campaign, Beijing is aiming at much bigger fish than high-roller casino patrons.