Archive for January, 2013

• “Founding Father of the Quants Was Revolutionary Marxist”
  Eddy Elfenbein, January 16th, 2013 at 5:51 pm

  Crazy! Here’s a snippet:

  Jacob Marschak may not be a household name today, but he inspired a number of financial practitioners and thinkers, from Milton Friedman to Harry Markowitz, and his insights are now the backbone of trading strategies and computer algorithms worldwide.

  Marschak was born to a Jewish family in Kiev, Ukraine, in 1898. He played a part in the Russian Revolution as a teenager, working as a Menshevik activist. The liberation of Ukraine from the czar’s Russian Empire vaunted Marschak into the position of labor minister of the short-lived independent state of Terek.

  Within months, the state was absorbed by another region and then subsumed into the Soviet Union. A disillusioned Marschak fled to Germany, where he received training in the Austrian School of free-market economics. He hoped to make a permanent home in Germany, but when the Nazis came to power, the Jewish- radical-turned-Marxist-turned-Austrian-School-economist wisely left the country, moving first to England and then to the U.S., where he joined the New School in New York as part of an anti- fascist University in Exile.

• Remember Volatility?
  Eddy Elfenbein, January 16th, 2013 at 4:11 pm

  Check out the last five closes for the S&P 500:

  January 10: 1,472.12
  January 11: 1,472.05
  January 14: 1,470.68
  January 15: 1,472.34
  January 16: 1,472.63

  That’s an average daily swing over the last four days of just 0.085%. That’s the lowest in more than seven years.

• Industrial Production Reaches 4-1/2 Year High
  Eddy Elfenbein, January 16th, 2013 at 1:57 pm

  We had some important economic reports today. Let’s run down a few highlights:

  The government said that consumer inflation was unchanged in December. The “core rate,” which excludes volatile food and energy prices, rose by 0.1%. This exactly matched consensus. For all of 2012, inflation rose by 1.7% while the core rate was up by 1.9%.

  The Federal Reserve said that industrial production rose by 0.3% in December. That follows a 1% rise in November which was largely a post-Sandy rebound. Industrial production is now at its highest level since June 2008, and we’re not too far from the all-time high reached in December 2007. Capacity utilization is up to 78.8%.

  

  Yesterday, the Census Bureau reported that retail sales rose 0.5% in December on a seasonally-adjusted basis. Sales were up 4.7% from a year ago. Bill McBride of Calculated Risk notes that retail sales are up 25.4% from the bottom of the recession, and are up 9.7% since the pre-recession peak.

• VIX Drops to 67-Month Low
  Eddy Elfenbein, January 16th, 2013 at 12:13 pm

  The Volatility Index ($VIX) got down to 13.20 today. That’s the lowest reading since June 20, 2007.

  Here’s a sense of how low volatility is: Three of the last four S&P 500 closes have had 1,472 handles (1,472.34, 1,472.05, 1,472.12), and we’re close to having another one today.

  

• JPMorgan Chase Earns $1.39 Per Share
  Eddy Elfenbein, January 16th, 2013 at 11:31 am

  Before the bell, JPMorgan Chase ($JPM) reported very strong fourth-quarter earnings of $1.39 per share, which easily topped Wall Street’s forecast. CEO Jamie Dimon said, “The firm’s results reflected strong underlying performance across virtually all our businesses for the fourth quarter and the full year, with strong lending and deposit growth.” This was a very good report.

  Overall revenue rose 10% to $23.7 billion. I was particularly impressed with JPM’s mortgage business. Revenue in that sector jumped to $2 billion from $723 million in Q4 of 2011. Clearly, the housing rebound is also spilling over to financial services.

  Trading results, which were hurt in the third quarter as the price of bank debt rose, were similarly affected in the last three months of 2012. The bank booked a $567 million pretax loss from a so-called debt-valuation adjustment in the fourth quarter as the price of the bank’s debt rose, compared with a $211 million loss in the third quarter.

  Fixed-income and equity-markets revenue climbed to $4.07 billion from $3.43 billion a year earlier and declined from $4.77 billion in the third quarter, the company said. Investment-banking and trading revenue is estimated to have jumped 44 percent across the industry from the same quarter in 2011, according to Betsy Graseck, a Morgan Stanley analyst in New York.

  (…)

  The investment bank’s fixed-income trading book, which contains the remaining credit derivatives position, generated $3.18 billion in revenue compared with $2.63 billion in the fourth quarter of 2011.

  Fewer consumers fell behind on their credit-card payments in the fourth quarter compared with the same period in 2011. Loans at least 30 days overdue, a signal of future write- offs, fell to 2.1 percent from 2.81 percent in the fourth quarter of 2011. Write-offs dropped to 3.5 percent from 4.29 percent the prior year and 3.57 percent in the previous quarter.

  Consumer banking, which includes home loans and checking accounts, earned $2.01 billion in the fourth quarter, up 28 percent from $1.57 billion a year earlier. Net interest margin, which measures the profit margin on lending, narrowed to 2.4 percent from 2.7 percent a year earlier.

  A lot of the headlines around today’s earnings are focusing on the big trading loss from the London Whale. The government is rightly taking the company to task for this. The bank also took a charge of $700 million as part of a settlement for mortgage abuse allegations. In response to the London Whale debacle, JPM’s board slashed Jamie Dimon’s pay in half from $23 million to $11.5 million. On a per-share basis, that’s miniscule. It works out to 0.6 cents per share being cut to 0.3 cents per share.

  As I’ve said before, Jamie Dimon gets a great deal of attention but that blurs the fact of how large JPM really is. For the year, the bank earned $21 billion on revenue of $97 billion. The London Whale loss amounted to $6 billion. Yes, it was awful, but hardly life-threatening. In just a few weeks last year, the stock plunged from $43 to $31.

  The stock initially dropped this morning after the earnings came out, which is an odd reaction. Since then, however, JPM has steadily rallied and it’s at a new 21-month high.

  

• Morning News: January 16, 2013
  Eddy Elfenbein, January 16th, 2013 at 7:00 am

  World Bank Cuts Growth Forecasts as Developed Nations Lose Steam

  Slowdown in Germany Worries Euro Zone

  Japan’s Abe Turns to South East Asia to Counter China

  Morgan Stanley Cuts Asia Commodity Jobs Including Two VPs

  Fitch Unveils Two Possible Routes to Downgrading U.S. Debt Rating

  Rosengren Sees QE Until Jobless Rate Hits 7.25%

  ANA and JAL Ground Boeing 787 Fleets After Emergency

  Jack Ma’s Retirement Might Mean A 2013 Alibaba IPO For Yahoo Shareholders

  While ‘Math’ On Dell Private-Equity Buyout Works, Odds of a Deal ‘Probably Low’

  GM Sees Modest Profit Gain This Year

  Walmart Plans to Buy American More Often

  A.I.G. Seeks Approval to File More Bank Suits

  Krispy Kreme Adopts Poison Pill

  Joshua Brown: 361 Capital Weekly Research Briefing

  John Hempton: Notes On Visiting an Herbalife Nutrition Club in Queens

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• Fiserv Offers Earnings Guidance for 2013
  Eddy Elfenbein, January 15th, 2013 at 1:11 pm

  Fiserv ($FISV) is in the news today. The company said that it’s buying Open Solutions for $850 million. Fiserv also offered some earnings guidance:

  Based on preliminary information, the company anticipates its 2012 adjusted earnings per share to increase approximately 12 percent over 2011. The company also anticipates its 2012 adjusted internal revenue growth to be at 2 percent for the full year.

  On a preliminary basis for 2013, the company expects adjusted internal revenue growth of 3 to 4 percent, and 15 to 18 percent adjusted earnings per share growth over 2012.

  The company will supply its actual results for 2012, and formal guidance for 2013, in its year end conference call on February 5, 2013.

  Let’s run the numbers. In 2011, Fiserv earned $4.58 per share. So 12% earnings growth comes to $5.13 per share for 2012. For the first three quarters of this year they’ve earned $3.75 per share, so working it out, Fiserv expects $1.38 per share for Q4. That’s below Wall Street’s forecast of $1.42 per share.

  For 2013, Fiserv’s growth targets translate to earnings of $5.90 to $6.05 per share. The Street had been expecting $5.78 per share. Despite the poor guidance in the short-term, Fiserv has guided Wall Street significantly higher for this year. Still, the stock is currently down about 2.3% in today’s trading. I like this stock a lot and it’s hardly too expensive at less than 14 times this year’s earnings.

• Morning News: January 15, 2013
  Eddy Elfenbein, January 15th, 2013 at 7:17 am

  German Economy Contracted 0.5 Percent In Fourth-Quarter On Euro Crisis

  UK Inflation Holds Steady At 2.7%

  Bernanke to Weigh QE Costs as Fed Assets Approach Record

  Treasuries Rise Second Day as Lawmakers at Debt Impasse

  Fitch Warns of US Downgrade Over Debt Fight

  Geithner Says Debt Limit Steps May Run Out By Mid-February

  Dell LBO to Test Market’s Appetite for Return to Boom Era

  Jack Ma Steps Down As Alibaba Chief

  Anglo American to Close Some Platinum Mines

  U.K. Retailer HMV Enters Administration

  GM Hangs on to Lead Over Volkswagen in Full-Year China Sales

  In Unlikely Comeback, Chrysler Is Outgaining Bigger Detroit Rivals

  How Pursuit of Billionaire Hit One Dead End

  Roger Nusbaum: Your Own Utopia

  Cullen Roche: 12 Cognitive Biases that Prevent you From Being Rational

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• Dell Jumps on Possible Buyout News
  Eddy Elfenbein, January 14th, 2013 at 2:56 pm

  

  Last month, shares of Dell ($DELL) jumped after an analyst at Goldman wondered whether the company could be the target of a buyout offer. Today Bloomberg is reporting that Dell is talking with two possible suitors.

  Round Rock, Texas-based Dell is discussing going private with at least two firms, said one of the people, who declined to be identified because the talks are private. The discussions are preliminary and could fall apart because the firms may not be able to line up the needed financing or resolve how to exit the investment in the future, the people said.

  Several large banks have been contacted about financing an offer, one of the people said.

  Michael Dell owns 15.7% of the company, so he’s made about $400 million since the Bloomberg story came out.

  By the conventional numbers, Dell is cheap at this price. But I wonder how sustainable their business is for the long term.

• Apple Drops Below $500
  Eddy Elfenbein, January 14th, 2013 at 11:39 am

  It’s an oddly quiet day today on Wall Street. The indexes are down but not by much. The only news to catch my attention is that shares of Apple ($AAPL) briefly dropped below $500. The stock was over $700 in September. The shares now yield more than a 10-year Treasury bond. Of course, let’s keep in mind Apple’s great run. The stock was below $50 on October 13, 2005.

  It’s rather stunning how quickly the market has turned against Apple. I suspect that Apple’s fall has farther to go. Going by the numbers, Apple appears to be cheap. The current consensus is that Apple will earn $57.07 per share in the fiscal year ending in September 2014. Of course, Apple missed earnings the last two reports. The one in July was particularly bad.

  I had considered putting Apple on this year’s Buy List but ultimately, I didn’t want to move just yet. I’ve learned that when you use a value strategy for investing, you often get to good stocks too early. Ford is a good example. We were right that it was cheap but it took the market longer than I thought to realize that. There’s a saying on Wall Street that you often make the most money on an investment in the second or third year you own it. Apple’s earnings report is due next Wednesday.

  I’m still a little puzzled by the reaction of Wells Fargo ($WFC) to its earnings report. I thought the numbers were pretty good. The stock opened lower on Friday but rallied as the day wore on. The shares opened down again today. Stay tuned for JPM’s earnings report on Wednesday. I’m expecting them to beat consensus.