the current earnings season

Two things strike me about the current earnings reporting season for US publicly traded companies:

–the market reaction to reported results, both weak and strong–and to forward guidance as well–has been unusually sharp.  Rises/drops of 10% on news haven’t been uncommon

–much of the data that the market is reacting to has already been in the public domain before the company earnings announcement made it “official.”  This lack of discounting in advance is very unusual.

Qualcomm (QCOM–I’ve owned it in the past but not now) is a good example.  The stock dropped by 9% after the company said that two developments would damage future results:  Samsung will not include a QCOM Snapgragon chip in its next generation smartphone; and QCOM is having trouble collecting royalties in China.  But who didn’t know this already?   The former news has been circulating on the internet for weeks, and the latter was the subject of a full-page in-depth article in the Financial Times three days before the earnings report.

As I was thinking about this last night, it struck me that the last time I can remember similar behavior in the US stock market was in 1991.  Even though economic circumstances are far different then, the 1991 stock market might turn out to be a good template for 2015.

In mid-1990, world markets slumped as Saddam Hussein invaded Kuwait.  Markets rallied back to their prior levels when the US invaded Iraq in January 1991–but went sideways for most of the rest of the year.

During the sideways time, stocks with their own growth story–that didn’t depend on general economic trends–could do no wrong (fledgling biotechs were rock stars).  Commodity stocks, in contrast, were repeatedly pummelled.  Industrial, or other relatively economically sensitive areas, were trashed as well, though, as I recall, not so badly as raw materials names.

This uncomfortable period came to an abrupt end in late 1991, as signs of a general economic upturn began to be seen.  Biotechs promptly crashed.  Economically sensitive stocks surged.  And the market went from ignoring the future and rehashing current earnings reports to discounting into prices anticipated earnings for 1992 and beyond.

If the 1991 analogy holds true, domestic US companies seem to me to be the current safe haven, while those with EU exposure are in trouble.  Niche companies or special situations will be in their own special nirvana, and economically sensitive ones simmer in purgatory.

Nothing much new there.

The point is that in a 1991-like market the same news gets discounted over and over again for an extended period.  There is no countertrend rally that gives relief to out of favor sectors, no reversal of form for underperforming names.

If I’m correct, the cost of deciding to ride out poor portfolio positioning with the idea of maybe repositioning during a countertrend move will prove more costly than the experience of the past half-decade would lead anyone to expect.

hedge funds and investment research

On Monday, the Wall Street Journal ran an interesting article, “Hedge Funds Learn Secrets Not So Safe.”  It’s about brokerage house research reports on individual companies.

Brokers provide research to customers either by giving them access to a research website, which contains all a broker’s research reports, and/or by responding to requests for specific research items, including meetings with analysts.  The problem with this is that brokers collect and analyze all their points of contact for the information they contain.  Conclusions will certainly wind up on the firm’s sales desk and can easily end up on the firm’s proprietary trading desk, too.

The same written  information is also available to authorized customers through third-party information services like Bloomberg.  I can use my Bloomberg account not only to call up a chart of a company’s stock price, see summary financial statistics and find out who a company’s major suppliers and customers are.  I can also read brokerage research from the brokers I do business with.  Not having read the service agreements they’ve signed, hedge funds have apparently assumed that if they read brokerage house report on a given target investment using a third-party information service, the broker never finds out.  By doing so, they’ve outwitted the broker and avoided information leakage.

Not so.

The third-party information providers supply such usage data to brokers, sometimes being as specific as what person at a given firm has accessed a report.  In fact, the article cites an instance of an unnamed analyst finding out his research wasn’t as stealthy as he’d thought when the broker whose report he’d been reading called him up and offered to arrange a meeting with the target company.


What I find odd is that there’s an obvious way to prevent information leakage–do the research yourself.  There’s a ton of relevent information available from the SEC’s Edgar site, as well as from government agencies and industry trade associations.  There are also suppliers and customers to talk to.  There’s gossip on the internet, too.

In my experience, except for a narrow set of highly technical areas (where you can always hire a consultant), the picture you create yourself will be more accurate, relevant and in-depth than anything a brokerage report can provide.  Yes, the brokerage analyst may be willing to say things on the phone or in person that he wouldn’t care to commit to paper, but that’s another issue.

Two issues:  compiling a thorough analysis of a company may take a week or two, as opposed to taking an hour to read someone else’s work.  Also, the analyst has to have the skill and experience to do independent work.

I can’t imagine that taking an extra week is the crucial variable.  That leaves the possibility that the firms the WSJ is writing about are so weak they don’t know how to do research themselves.  Hard to fathom.  I guess they’re just great marketers.





1Q15 earnings for Apple (AAPL)

the earnings report

Last night AAPL reported results for 1Q15 (the company’s fiscal year ends in September).  Earnings came in at $18 billion, up 37% year-on-year.  EPS came in at $3.06, a 48% yoy advance (the difference is due to the company’s aggressive stock buyback program, which has shrunk the number of outstanding shares).  These figures were far in excess of the Wall Street consensus, which was centered around eps of $2.60.

This is the first time in at least two years that AAPL has had a positive earnings surprise this large.  The $18 billion also sets a new all-time record for profits by a publicly traded company.  Lots of positive media reports, focusing on the records shattered.

As I’m writing this, the stock is up almost 8% on the news.

the highlights

I hven’t looked carefully at AAPL quarterly earnings for a whole (there’s been no need to).  I’d almost forgotten the teeth-achingly saccharine quality of the Applespeak the company uses in dealing with the investing public.

More substantive thoughts:

–the Steve Jobs era is over  Jobs left the company with powerful earnings momentum, an upscale image, design flair and the iPod, the iPhone and the iPad.   He also left behind some bad stuff–a dogmatic belief in a tablet size that was too big and a smartphone size that was too small.  After struggling for some time, the company has now thrown off both those mistakes.

–the Apple brand/ecosystem has huge power  Pentup demand for a larger smartphone drove iPhone sales in the  holiday quarter to 74.5 million units, a 46% yoy gain.  Inventories fell to unusually low levels during the period, suggesting sales were constrained by AAPL’s manufacturing capability.  (Stocks are now back at normal levels.)

In other words, even though Samsung and other Android suppliers were offering a clearly superior product, Apple users by and large continued to use their dated phones in the hope that the company would finally come to its senses.  Where else would this happen?  AAPL reported that 1Q15 was the highest period ever for Android users switching to the iPhone, suggesting that the small number of prodigal sons/daughters were returning to the fold.

earnings growth will continue strong  Only a small percentage of AAPL  smartphone owners have upgraded to the iPhone 6  …10%? – 15%? of the total.  This seems to me to imply that AAPL’s yoy earnings comparisons will continue to be healthy for at least the next several quarters, despite a lower dollar value of foreign currency sales.

odds and ends

–Computers were strong for AAPL; tablets were weak

–Sales in Greater China were very good

–The strong dollar means currency was a negative factor in the quarter, even though the raw numbers down’t seem to reflect that.  Currency will continue to be a problem.  Curiously, the yen seems to have been more of an issue than the euro (implying that AAPL hasn’t made much penetration into the EU?).  Hedging will temper currency losses for a while, but AAPL, like most companies, gives little detail on the nuts and bolts of its hedging operations.  So it’s very hard to figure currency effects.  AAPL, however, is guiding to a strong yoy earnings gain in 2Q15 despite this.



December 2014 earnings for Microsoft (MSFT)

the report

Last night MSFT announced earnings for the December 2014 quarter, which is the second fiscal quarter of 2015 (ends in June).  At eps of $.71 a share, results were in line with analysts’ expectations, even though income was dinged by $.02  by restructuring charges and $.04 from an IRS audit adjustment.

Overall, the report was a mixed bag.

On the one hand, the restoration of MSFT to relevance under new CEO Satya Nadella continues apace.  On the other, the renewed vigor that the traditional MSFT business has been exhibiting recently appears to be coming to an end.  In particular,

–In the earnings release on the MSFT website (data are humorously difficult to download if you don’t own Office) the company made it clear that the period of extra oomph to sales of Windows caused by the termination of XP support has come to an end.  Sales had been boosted both by some former XP users upgrading to new machines and by others simply buying a newer OS.

–It’s also clear that we’re entering a period where currency effects–the decline of the euro and the yen vs. the dollar–are going to have a significant negative impact on earnings.  I think this means a drop of somewhere between 5% and 10% vs. where profits would be without currency movements.  This loss takes two forms:  a decline in the value of foreign currency-denominated assets, which is recognized immediately (in 2Q15 the figure was ($390 million); and the lower dollar value of foreign currency-denominated sales.  Part of the latter is recognized in income immediately but most sits on the balance sheet as deferred revenue before reaching the income statement (this is a long-winded way of saying that some currency losses won’t be booked for a while).  And, of course, the euro is about 8% lower today than it was on December 31st.  MSFT estimates the 3Q15 loss at 4% of revenue.

The net result of these two negatives will likely be that eps for MSFT will be flattish over the coming twelve months, rather than the +10% that most analysts appear to have been forecasting.  (How they justified these numbers in the face of the strong dollar is another issue.)

the stock

As I’m writing this, MSFT shares are down by 10%, in a market that is off by a bit less than 2%.

It’s also a day on which I’m sure lots of people didn’t make into work (and those who did are in a bad mood), as well as one where a raft of negative-surprise earnings releases have been issued.  So it’s not a good day to announce bad news.

Still, I’m personally a bit surprised by the extent of the negative reaction.  I’m not sure quite qhat to make of it, other than it’s very negative.

I have no desire to sell the MSFT I own.  On the other hand, I have no burning desire to buy more.

If I thought 2015 would be a sharply up year for stocks, I’d probably be thinking of selling to buy something with more upside potential.  But I expect the market to basically move sideways this year.  So I’ve got to be more concerned that this decline is just the first stop on a down elevator.  Right now, I don’t think that’s right, either.  But that’s where analysis has to be focused.

My biggest reaction is that I’ve got to look even more carefully through the stocks I own to uncover exposure to weak foreign currencies.  Ultimately, I guess, I believe this is the cause of the sharp MSFT price drop.

The main thing the MSFT report tells me is that Wall Street is much less far along than I would have imagined in discounting currency losses to US-based multinationals from a declining euro.  A second observation is that the European stock markets have probably been as poor at factoring in earnings gains that euro-based firms are achieving from their dollar exposure.





the Greek election

Yesterday Greece held a parliamentary election.  Its result was that the sitting government was replaced by a coalition whose main platform is renegotiation of the terms of that country’s bailout agreement with its EU creditors.

The Greek argument for further restructuring is that the country has suffered enough by not having grown for a half-decade, that it has made significant structural reforms and that, at 175% of GDP, its euro-denominated sovereign debt is impossible to repay no matter what Greece does.

The other side is, more or less, that Greece deliberately deceived lenders for years by issuing falsified national accounts, so it doesn’t deserve better treatment.  (There’s a fuller discussion in my posts  about Greece from 2010.)

When I saw the election news last night, the euro had declined by about a percent from Friday’s close and S&P 500 futures were down by about 12 points.  As I’m writing this, the euro is up by more than a percent against the USD, stocks indices across Europe are rising and the S&P is down by about half what the futures in Asia were showing.

How so?

I think the markets are coming around to the view–which I think is probably correct–that the EU knows deep down that the current austerity regime is unsustainable, particularly in the current no-growth situation for the union as a whole.  Greek may well be the trigger for a more general rethink of a restrictive fiscal policy that simply hasn’t worked.

If so, this would be another reason for a harder look at beaten up EU stocks.



the euro, the US$ and the Swiss franc

With the beginning of quantitative easing by the European Central Bank, the euro has slipped against the USD by about another 3% today to a value of 1 € = US$1.12.  That’s a decline in the euro of about 7.5% just since January 1st.  The EU currency has tumbled by more than 14% vs. the greenback over the past year, and by almost 20% since its high of $1.39+ last May.

This is an astounding fall for the world’s second most important currency.  It’s an enormous boost for EU-based enterprise overall and for exporters in particular–as well as a huge burden for their hard currency-based rivals. It would also be a mind-boggling loss of national wealth for EU citizens, were it not that Japan has depreciated the yen by a third over the past few years in a bid to regain global relevance for its manufacturing base.

Enough of this.   Down to brass tacks:

the euro/dollar

The income statements of US companies with EU exposure will be savaged by the currency decline.  Yes, in theory they may be able to raise prices to recover some of their depreciation-created losses.  But the general rule in this situation is that prices can only go up in line with overall inflation–which is non-existent in the EU at the moment.

My strong feeling is that Wall Street hasn’t fully worked this out yet.  So combing through our holdings to find euro victims should be a high priority for each of us.

the euro/Swiss franc (CHF)

The CHF has gained almost 25% against the euro since the Swiss central bank depegged its currency from the euro a little more than a week ago.  The speed of the move clearly shows what should have been apparent over the past year of euro depreciation–that the Swiss government was trying to maintain a peg that was miles away from where the cross rate would be without constant economy-distorting intervention.

We know this sort of thing can’t last.  If the forty-year history of floating exchange rates shows anything it’s that trying to maintain an artificial exchange rate always ends in disaster.  Yet what continues to come out in the press post-depegging is that:

–lots of EU property owners had decided it was a great idea to take out a CHF-denominated mortgage on their homes.  Short-term rates were negative, after all.  Ouch!

–a number of commodities brokers are in serious financial trouble because they allowed individual clients to build up short-CHF positions on margin that were so big there’s no chance they’ll ever be able to repay the losses they’ve incurred.

–there’s been a parade of currency trader departures from hedge funds caught out by the same short-CHF bet.

I guess this just shows that P T Barnum was right–that despite the examples of the collapse of the pre-euro Exchange Rate Mechanism in the early 1990s, the Asian debt crisis later in that decade and all of the problems with one-size-fits-all Eurobonds, there are still tons of people willing to take what history shows is the losing side of a wager.



the view from Canada

Yesterday the Governor of the Bank of Canada, that country’s central bank, announced it was lowering short-term interest rates from 1% to .75% as an “insurance” measure to help the Canadian economy adjust to lower oil and gas prices.  The move doesn’t come as a huge surprise, given that the oil and gas industry is close to 10% of the Canadian economy and has been accounting for about a third of its GDP growth.

In the words of Governor Stephen Poloz, “The drop in oil prices is unambiguously negative for the Canadian economy.  Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.”

To me, more interesting is the bank’s quarterly Monetary Policy Report, released at the same time, which deals with the global effects of lower oil.  It says:

1.  the Bank is assuming the oil price ultimately recovers to US$60 a barrel–no $100 oil anywhere in sight

2.  Canada gradually shifts focus to non-energy industries of the type which have been in decline during the energy boom years

3.  the net effect on world GDP growth of the oil price fall is zero, both in 2015 and 2016.  On an area by area basis, however:

–the US is a net winner.  It grows at a real rate of  +3.2% in 2015 (rather than the previously projected +2.9%) and +2.8% )+2.7%) in 2016

–China is, too.  It expands at +7.2% (+7.0%) and +7.0% (+6.9%)

–the EU, as well.  It advances at +0.9% (+0.8%) and +1.2% (+1.0%)

–Japan is up by +0.6% (+0.7%) and +1.6% (+0.8%)

–the rest of the world is a mild net loser, growing at +3.1% (+3.2%) in 2015 and reounding to +3.4% (+3.4%) the following year.

In the last category, Canada grows at +2.1% (+2.4%) this year before rebounding in mid-2015.