Posts Tagged ‘Margins’

David Rosenberg Explains the Housing “Recovery”

Thursday, July 5th, 2012

 

Confused by all the amusing arguments of a housing “recovery” (because if you believe in it, it just may come true…. maybe) in the sad context of a reality in which the economy is once again turning from bad to worse missing expectations left and right (for every report surprising to the upside, two do the opposite), corporate earnings and margins have rolled over, US states and cities and European countries are filing for default or demanding bailouts at an ever faster pace, and only headlines such as “stocks rise on hopes of more central bank easing” appear in the good news columns of mainstream media? Don’t be: David Rosenberg explains it all.

From Gluskin-Sheff

HOUSING DATA SKEWED BY “UPSIDE-DOWNERS”

What is really driving whatever recovery we are seeing in terms of home sales and prices are the units that are so ridiculously priced — like at less than $125,000. These are where the multiple offers are coming into the fore — and then to be rented out. The reason is that this is the only part of the market that is truly “tight” because almost 30% of American homeowners either have no equity in their homes or less than 5% skin in the proverbial game (according to CoreLogic). These folks have to write their lenders a cheque to make a sale, so many are holding out until they can get a better price and the all-cash deals being placed by investors are allowing for this (note too that 45% of the nation’s homeowners have less than 20% of equity in their homes).

According to data cited by the USA Today, the supply backlog where over half of homeowners are “upside down” on their mortgage is at 4.7 months’; in areas where “upside down” borrowers make up less than 10% of the market, the listed inventory is closer to 8.3 months’ supply — it is in this mid-to-high end where prices are still vulnerable to downside potential — this is not the sliver of the market where vulture funds are looking to pick up a cheap unit to then rent out to the “boomerang” crowd.

As the charts below visibly illustrate, it is probably a little early to be celebrating the recovery in the U.S. housing market, despite the exuberance in the homebuilding stocks which only capture a small share of the overall industry. The market is healing to be sure, but is far from healed. Look at these graphs and draw your own conclusions.

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Neel Kashkari: Equity Outlook (April 2012)

Friday, April 13th, 2012

Newtonian Profits

by Neel Kashkari, Head of Equities, PIMCO

  • ​ Stock prices today are anchored on strong profits, hence investors’ intense focus on the sustainability of those profits. If they fall, stock prices are likely to follow.
  • No doubt individual companies and individual sectors will face margin pressure. But for the equity market as a whole, our central scenario is for corporate margins to remain strong in the near future.
  • As always, we are buying individual companies we like based on our analysis of their own fundamentals in the context of the economic environment they are operating in, and we are keeping one eye focused on managing downside risks.

​ We’ve all heard the story of Sir Isaac Newton sitting in his garden pondering the universe when an apple fell from above and supposedly smacked him in the head. It is said to have been a Eureka! moment when Newton first asked the fundamental question: Why? Why did the apple fall? For centuries people had seen objects fall, but Newton was the first to question what the rest of humanity had just accepted for thousands of years. Today Newton’s question seems obvious – but the most powerful ideas are usually obvious after someone points them out. Newton’s ability to see through the common beliefs of those around him and spot something important is a trait shared by scientific visionaries over the centuries – and one that the most successful investors have occasionally exhibited.

Newton’s questioning of nature led to his development of fundamental laws of physics that have transformed our understanding of the universe. Indeed, in many ways Newton’s ideas have become our own common beliefs similar to those that Newton so brilliantly looked past in his own time. Newton’s Laws, as they are called, are taught in introductory physics classes worldwide:

  1. A body at rest tends to stay at rest. A body in motion tends to stay in motion.
  2. Force is equal to the product of mass times acceleration.
  3. For every action there is an equal and opposite reaction.

These simple rules permeate our beliefs about how the world works and we often don’t realize it. When people say “what goes up must come down,” they are implicitly referring to Newton’s Second Law: In the presence of earth’s gravity, a mass will always accelerate in the direction of that force. Hence, an apple thrown in the air (or grown on a tree) will eventually fall to the ground.

These Newtonian beliefs also affect how many people think about investing. “Mean reversion” is the investment world’s version of “what goes up must come down.” It’s usually a pretty good rule. Mean reversion suggested that the extraordinary price to earnings multiples of technology stocks in the late 1990s couldn’t last; they would eventually revert to historical average valuations. Similarly, mean reversion suggested that house price increases in the U.S. in the mid-2000s weren’t sustainable. They didn’t last either.

But is mean reversion always right? In 2000 mean reversion would have suggested the bull market for bonds would be over. Interest rates couldn’t stay low, let alone fall further, could they? But here we are in 2012 and we’re not predicting a bear market any time soon.

In tension with mean reversion is Newton’s First Law: A body at rest tends to stay at rest. In investment parlance there needs to be a catalyst to force the system to revert to the mean. Left alone, it may continue in its elevated state for a long time.

The timing of that reversion matters: Just because someone can identify a bubble doesn’t mean they can make money from their insight. People who shorted tech stocks too early may have lost a lot of money while the bubble kept expanding.

Today many equity investors are asking whether corporate profit margins can stay strong. Coming out of the financial crisis, many large corporations, especially multinationals, have enjoyed record profits. This is counterintuitive given the low growth much of the developed world has experienced during this time. Corporations responded to the financial crisis by paying down debt and cutting costs, positioning them for strong profit growth as their end markets slowly recovered. Figure 1 is a chart of corporate profit margins, earnings multiples and the overall level of the S&P 500.

Global equity markets have climbed 6.5% year to date (source: MSCI World Index through 11 April 2012). With record profits, earnings multiples still seem reasonable at 14.5 times. Stock prices today are anchored on strong profits, hence investors’ intense focus on the sustainability of those profits. If they fall, stock prices are likely to follow. To assess the vulnerability of profit margins, let’s review several possible catalysts for profit mean reversion and consider how likely they are to occur:

1. Increase in Cost of Labor
Labor costs are about 70% of the total cost of production for corporations, according to Federal Reserve research. There is no question that if competition for a finite labor pool increased, this could put immediate pressure on corporate margins. However, in the U.S. unemployment remains high, stuck at 8.2% as of March 2012, with 14.5% of Americans either out of work or looking for more work (source: Bureau of Labor Statistics). Obviously individual industries and companies may experience wage inflation due to scarcity of workers with specialized skills, but until unemployment falls closer to more normal levels, corporate margins do not appear vulnerable from a spike in unit labor costs. Last week’s disappointing jobs report highlights labor’s slow recovery.

2. Economic Slowdown or Recession
Clearly if the U.S. or world economy were to meaningfully slow or fall into another recession, corporate profits and stock prices would suffer. Our base case continues to be a muddle-through scenario of low growth while avoiding recession in the U.S. and globally (though we do forecast a recession in Europe due to their fiscal crisis and policy response). Certainly a disorderly unraveling of the eurozone, an oil price shock or a hard landing in the emerging markets could tip the global economy into recession, but that is not our central scenario.

3. Dollar Strengthening
Strong appreciation of the dollar would make U.S. exporters less competitive, which would certainly affect their margins. But companies producing goods and services abroad for sale in America would benefit. Our base case scenario is for a long-term secular decline of the dollar, which assumes continued strengthening of emerging market economies and a Europe that muddles through its fiscal crisis. If either proved incorrect, they could trigger a global recession, which would have a larger impact on corporate margins than dollar strengthening alone.

4. Cost of Capital Increase
If costs for corporations to borrow or to raise equity capital increased substantially, corporate margins would be vulnerable. Corporations today on average have low net leverage with record cash of some $2.23 trillion, according to Federal Reserve data. Climbing rates could pressure corporate margins. They could also push companies to grow more slowly or even contract their activities. Again, this is not our central forecast. We believe the Federal Reserve will stick to its forecast of maintaining exceptionally low rates until at least late 2014, and we believe the European Central Bank will be forced to continue aggressive monetary stimulus to combat its fiscal crisis. It is worth noting that corporations could in fact increase their net leverage from today’s conservative levels, which could actually boost corporate margins.

5. Increased Corporate Taxes
If the federal government increased effective taxes on corporations their net margins would obviously fall. But this appears highly unlikely in today’s political environment. Both Democrats and Republicans are advocating various policies to boost job growth, including pro-growth corporate tax reform. The most common tax reform proposals are revenue neutral, lowering marginal corporate tax rates in exchange for eliminating loopholes and deductions. Policy theory suggests a simpler, fairer tax code should encourage investment and enhance economic competitiveness. While political winds can change direction, as long as unemployment remains high, politicians will be cautious about increasing barriers for corporate investment.

None of these catalysts for profit mean reversion appears likely in the near future, though each is impossible to rule out. Given the importance of corporate margins on today’s stock prices, it is worth taking this review further and also considering a macroeconomic perspective on margins.

Some investors have used the Kalecki profits equation to break corporate profits into its fundamental macroeconomic elements, specifically:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends

From this equation, investors can see that corporate profits have expanded to such a large share of GDP due to large government deficits. Therefore, if the government implemented a deficit reduction plan, corporate profits could suffer.

Let’s explore this scenario in more detail. We know that Washington D.C. is currently dysfunctional and that large deficit spending is ultimately unsustainable. However, if Republicans and Democrats can agree on anything, it is to keep spending. This is the reason Washington hasn’t produced a new Federal budget in three years – they have simply agreed to extend the status quo. Hence the dysfunction of Washington suggests no meaningful deficit reduction agreement in the near future. Don’t forget that President Obama and both Congressional Republicans and Democrats were united in their dismissal of the serious Simpson-Bowles deficit reduction plan.

Let’s say the tone in Washington does somehow change and consensus is reached to bring the Federal budget into balance. Policy analysts of both parties know that long-term deficits are being driven by demographic changes and the long-term expansion of entitlement programs for our aging society. As with Simpson-Bowles, any major deficit reduction agreement would almost certainly phase in slowly, over many years. Even though current law prescribes a fiscal cliff at the end of this year due to last year’s temporary budget and debt ceiling extensions, Washington will almost certainly agree to delay this deadline. It is hard to imagine an abrupt fiscal adjustment happening in the near future.

If there were a long-term grand bargain, it is true federal government deficits as a percentage of GDP would likely fall, but such a scenario would almost certainly be a net positive for confidence in our economic and political systems and provide a strong tailwind to economic activity. Even if corporate margins fell as federal budgets gradually came into balance, it is easy to imagine corporate profits continuing to grow. It is ultimately the dollars of profit, rather than margins, that drive the value of companies. It is hard to see corporate profits, or stock prices, falling because of long-term fiscal discipline.

These considerations all suggest corporate profits are not on the verge of collapsing. In fact, we are optimistic corporations, on a case-by-case basis, can even continue to improve them through the adoption of new technologies. As always, we are buying individual companies we like based on our analysis of their own fundamentals in the context of the economic environment they are operating in, rather than buying sectors or the market as a whole. No doubt individual companies and individual sectors will face margin pressure. But for the equity market as a whole, our central scenario is for corporate margins to remain strong in the near future. Profits are strongly correlated to nominal GDP. The Federal Reserve’s commitment to lowering unemployment through aggressive monetary stimulus should support both nominal GDP and corporate profit growth.

As we’ve written in the past, we are keeping one eye focused on managing downside risks in our equity portfolios. Serious risks from Europe remain, and at some point the Federal Reserve will have to end its aggressive easing policy. We are still living in a bimodal world, but we are finding good companies today at attractive values that are selling into higher growth markets. We prefer those with strong balance sheets that are paying healthy dividends.

Given the investment analogies of Newton’s First and Second Laws, you may be wondering if there’s an investment analogy for Newton’s Third Law: For every action there is an equal and opposite reaction? Yes: There is no free lunch. That’ll be the subject of a future Equity Focus. In the meantime, be wary of predictions of falling apples (I’m talking about the fruit).

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. ©2012, PIMCO.​

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U.S. Equity Market Radar (March 12, 2012)

Sunday, March 11th, 2012

U.S. Equity Market Radar (March 12, 2012)

The S&P 500 Index managed modest gains again this week, rising 0.09 percent with consumer discretionary and telecom leading the way.

S&P 500 Economic Sectors

Strengths

  • The telecom services sector was the best performer this week as expectations the company was gaining subscribers from competitors pushed Sprint up 11 percent.
  • The consumer discretionary sector was boosted by strong performance from the home builders as numerous indicators are pointing toward improving sales traffic.
  • Refining stocks were among the best performers in the S&P 500 this week despite overall weakness in the energy sector. Refining margins jumped by roughly $4 per barrel, a key indicator of profitability for the refiners.

Weaknesses

  • The materials sector was the worst performer this week as fears of a China slowdown gripped the market. Freeport-McMoRan led the way, falling by more than 7 percent.
  • The energy sector also faired poorly as coal stocks were weak for the second week in a row due to warm weather and high stockpiles at utilities.
  • For the third week in a row, First Solar was among the worst performers in the S&P 500 as industry dynamics remain very difficult for solar companies.

Opportunities

  • The market has been able to shrug off every negative data point and continues to climb that wall of worry.

Threats

  • After such a strong start to the year, a pullback or consolidation in the market would not be surprising.
  • It was announced late Friday afternoon that Greek credit default swaps (CDS) had been triggered. The market initially reacted negatively but eventually stabilized. It will be interesting to see how this is viewed in Europe over the weekend.

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Jefferies’ Peter Misek on The Future of RIM and Apple (Bloomberg)

Friday, November 11th, 2011

Peter Misek, Analyst, Jefferies and Company, is interviewed on Bloomberg Surveillance
November 8, 2011
SPEAKERS: Tom Keene, Bloomberg Surveillance Host
Ken Prewitt, Bloomberg Surveillance Co-Host

Peter Misek, Analyst, Jefferies and Company, 9:13 minutes

Listen to this interview here (press play):

http://media.bloomberg.com/bb/avfile/News/Surveillance/v2avxlmYpNnc.mp3

****

TOM KEENE, BLOOMBERG SURVEILLANCE HOST: Peter Misek with Jefferies on the future of BlackBerry. Peter, good morning.

PETER MISEK, ANALYST, JEFFERIES AND COMPANY: Good morning.

KEENE: You have some terrific research. First of all, you talk the paradox of smartphone growth in 2012. What do you mean by that?

MISEK: We mean that we are actually getting to smartphone saturation in the post-paid market, meaning contract cell phone users in the United States. And we are likely to reach that level in 2012 in western European economies, and then globally, a few years later.

And what that means is that growth going forward is going to be driven by the prepaid market and emerging markets, which means lower SPs and pressure on margins.

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST: Just out of curiosity here, when you talk about saturation in the U.S., at what point is it saturated and what percentage of people or households?

MISEK: We view saturation as greater than 50 percent of subscribers. So think one in every two adults who has a post-paid contract in the United States now has a smartphone is the way to look at it.

PREWITT: Okay. So Apple is almost there, right?

MISEK: Pretty much. If you look at what Apple’s growth is going to be in the future, it really has to come down to them targeting the iPhone at the prepaid market and at emerging markets.

KEENE: Can they do that? Can they go to a lower price point?

MISEK: Well, they are already doing that. The 3GS, which AT&T is now giving away for free, is actually a great device. It is two and a half years old almost now. And what is spectacular about it is the price that they are going to be offering it to international carriers in bulk is around $350, which is close to that magical $300 price point.

At a recent visit to China, when we met with the chairman of China Mobile and Telecom and Unicom, they indicated to us that at around $300 there was a market opportunity for 300 million subscribers to buy at that price point.

KEENE: Wow.

PREWITT: And that is even with a – it seems to be the consensus that China’s economy is slowing down.

MISEK: Even with the slowing economy. What is key here is that this is viewed as a status symbol, as a brand. If you cannot afford a house or a car, at least you can afford a phone to impress your friends.

KEENE: It’s a chick magnet.

What are you going to do with BlackBerry? I mean this is why we have you on. You mince no words about it, the challenges they face. Is this going to be a slow death? Or can they really rally?

MISEK: It really depends on their new operating system. And the trouble with that new operating system is that it is delayed. They had told the market that they were hoping to get this thing out early next year. The reality is we think it is coming out late next year.

KEENE: Wow.

MISEK: And as they slip it gets tougher and tougher. So in mature markets, when you reach saturation, you basically hope that customers churn off the iPhone or Nokia or somebody else and adopt BlackBerry, which is unlikely. Or you’ve got to go toe to toe in the emerging markets and the prepaid market, and that is tough.

KEENE: I mean it is at your price target and the chart itself, the erosion just from May is remarkable, from $45 to $18 on RIM, based in the U.S. pricing. Do you withstand at $18? Or could it glide below that?

MISEK: Well, we lowered our price target last week. The way we look at things is we always evaluate in the context of market dynamics. So we are going to be conducting some survey work globally here and we will see what the result comes out.

But right now, as it stands, it is going to be tough for the shares to recover if the fundamentals don’t recover.

KEENE: Within those fundamentals, what is the key metric on the income statement?

MISEK: The key metric actually is off the income statement. It is actually their subscribers. If those subscribers, that growth rate changes or slows, then the negative operating margin we have on handsets starts to become really problematic. And they can’t mask that for much longer.

PREWITT: All Things Digital is reporting that it is harder and harder to get an iPhone 4S.

MISEK: Yes.

PREWITT: It went on sale in Hong Kong, sold out within ten minutes. Some of the clerks at the Apple stores are saying go online and try to get one. Apple’s partners, like AT&T and Sprint and Verizon, seem to be running out. Does this indicate a supply chain problem of any kind? Or is it just so much demand?

MISEK: It is so much demand. I mean if we look at what the supply chain was prepped for it appears that the supply chain was prepped for somewhere around 25 million iPhone 4Ses from launch to the end of the year. And demand is eclipsing that.

So what we think is if the current demand trajectory continues and if they can build them, you are tracking close to 30 million, which is 20 percent higher, which is astonishing given that people originally thought this product was really nothing of an upgrade. And here it is proving everybody wrong again.

PREWITT: Yes.

KEENE: Well, I like how you put that. When does the free lunch end in how much we use these toys? I mean the bandwidth we are all using must be taxing – and by taxing I mean on the system, and extraordinary. Is there going to be a pricing revolution in the next couple years?

MISEK: The big challenges for the carriers are that their growth path relies on data. So they want people to use more data. But people have been unwilling to pay for it. So their challenge will be to get people to pay for it.

And really the only way we think that guys like Apple and carriers can work symbiotically going forward is the carriers can charge for a service. For example, Facebook, so think of a Facebook service on your phone. The carrier is charging you $5 or $10 a month, whatever the number is, and you can use Facebook all you want on your smartphone.

And so that kind of application specific charging is typically not allowed by regulators in the United States. But we think they are going to have to change.

KEENE: What is your single best buy right now?

MISEK: We’ll table pound on Apple here. We really -

KEENE: Really?

MISEK: Yes, absolutely. And it’s funny, everyone says, oh, its the consensus long. Whenever we talk to media, they like to poke it, bash it, they say it is expensive. It’s too big, etc. Growth is beyond it.

Our view is quite the opposite. We think that growth is accelerating, thanks to the 4S again. And importantly, we’ve got a huge product pipeline next year, new phone, an LT phone next year, a new iPad, and importantly an iTV.

PREWITT: What is your price tag?

MISEK: We have a $500 target on it.

PREWITT: $500, so that is almost 20 percent above where it is now.

MISEK: Yes, 25 percent. So we’ve got plenty of upside here.

PREWITT: Can I ask you about Apple TV?

MISEK: Yes.

PREWITT: What can you tell us about it?

MISEK: We can – we’ve wrote about this a lot. What we did was we did a white paper where we walked through all of Apple’s patent filings to try and piece together what this thing could look like. And what was amazing was we found dozens of patents related to a television, gesture based control, voice control, etc. And these are detailed patents that actually look at how you would interact with a television.

And so we think this is real. We think it is going to be manufactured by Sharp. We think it will be available in the second half of next year. And we think it will be available in conjunction with AT&T and Verizon.

PREWITT: What will it look like?

MISEK: It will look like a flat panel TV.

PREWITT: Yes, it’s sort of – it will be regular TV that you can carry around with you.

MISEK: I don’t know about carry around with you. It would be tough to carry around a 55 inch TV. But you can certainly hang it on your wall.

KEENE: So that’s remarkable.

PREWITT: Yes.

KEENE: They’re going to jump in there. What’s going to be the distinctive feature of it versus other TV products?

MISEK: Well, everyone says, oh, Apple will – can’t enter the TV market. It’s really tough.

KEENE: Right.

MISEK: Then you step back for a second and if I look at my children and how they use a television, they hate using it. There are three remotes. If I look at my parents, who are retired, they can’t come to my house and use the damn TV. So it requires such complexity, so many remotes, the inputs are terrible, finding a program takes forever. It’s a -

KEENE: Yes.

MISEK: – (inaudible) we’re talking a renovation.

KEENE: Right there – right there alone, if they can solve that problem, -

PREWITT: Yes.

MISEK: So imagine this, imagine that you have your entire iTunes library as well as live television integrated into one user interface. Imagine you wanted to watch Cheers or Bloomberg, for example, and you just say to the TV, hey, put Bloomberg on, or find me Cheers, and it will tell you, would you like live or would you like library and it gives it to you. And a mix of that really simple interface we think is really -

KEENE: Wonderful.

PREWITT: Really simple. You mean I won’t have to borrow somebody’s eight year-old to show me how to use it?

KEENE: Yes, exactly.

MISEK: Exactly.

KEENE: Peter, thank you so much.

PREWITT: Thanks, Peter.

KEENE: Peter Misek with Jefferies. Great, great to have him on, and again, very cautious on RIM, an under perform. And Apple seems to be his single best buy.

***END OF TRANSCRIPT***

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David Winters: Finding Value Opportunities Globally

Wednesday, June 22nd, 2011

David Winters, CEO, Wintergreen Advisers, who manages $2.2-billion (incl. $210-million Renaissance Global Markets Fund in Canada) is optimistic about finding great value around the world, and in the U.S., and he talks to CNBC about where and what he likes, even in these markets.

CNBC Transcript
Bill: Our next guest sees troubles as more of distraction from real opportunities he sees around the world in markets. David Winters, CEO of Wintergreen Advisors, considers himself in the minority and they have far outpaced the broader markets with returns of 25%. Where is he finding value with 60% of his $2 billion in assets in companies outside the U.S.? You get about 20% in the U.S. as well. Good to see you.

David Winters: Good to see you as well, Bill.

Bill: You’re not sitting here fretting about the Greek vote?

Winters: That’s the sideshow. There’s such big opportunities in the far east and around the world. There’s a couple billion people who want everything that we have, Bill, and they will work really hard to get it.

Bill: You came from the east, been in Asia the last six weeks. What did you find? We hear anecdotally, there’s wear and tear on margins now on the red hot economies over there.

Winters: Absolutely. At the end of the day though, girls still want jewelry, men want watches, everybody wants a better life for their children. So we think that if you focus on the long term, Bill, there’s a lot of money to be made.

Bill: What about here in the U.S.? You have 20%. What are you investing in?

Winters: We own companies like Norfolk Southern railroad, which will benefit from the recovery in the economy. They have vast coal reserves and they’re well run and we think there are companies to invest in, here in the United States, but if you cast your net globally, you have a lot of opportunity to make money.

Bill: You find a lot of opportunity in Singapore, right?

Winters: Singapore is interesting, but a small place. we like a company like Jardine Matheson that trades there, but earns its money throughout Southeast Asia. We like the idea of making money 24 hours a day.

Bill: Are you concerned China is due for a major correction at some time? does it concern you? I imagine you will look beyond that one as well.

Winters: I’m worried, of course. I have seen lots of construction, but at the end of the day, you have a billion and a half people and they want to work hard and they want everything. I’m sure there will be blips but we’re optimistic.

Do you play it by investing directly or do invest in Multinationals are are able to provide those goods and services overseas.

Winters: As they say, Bill, right on the nose. Global companies, super-regionals; we haven’t really found too many local companies yet but we’re looking.

Bill: Before I let you go, we should point out you like Berkshire Hathaway at these levels?

Winters: Yes, Berkshire, like most of the New York Stock Exchange is unloved, and we think it’s cheap. you would buy it at these levels here. I’m not supposed to say that, but I would say this.

Bill: What’s the catalyst to move that higher?

Winters: I think at some point the sentiment changes. People wake up and they go, things are really going to be all right and stocks move much higher, and I think Berkshire will be one of the stocks that moves higher.

Bill: David Winters, always good to see you.

Copyright © CNBC

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A Not-So-Marginal Risk in Silver

Wednesday, June 8th, 2011

By EconMatters

Our research analyst John Gray was interviewed by Carolyn Cui from Wall Street Journal regarding why we believe CME should have raised margins on silver earlier and had missed the best opportunity to do so.

Below are excerpted from Carolyn’s article–Tripped Up by the Margin–dated June 8, 2011 along with some more of our thoughts:

Commodity investors have long been used to wild market swings driven by wars and hurricanes. But recently a new risk has been added to their list: margin requirements.

Investors are still crying foul over CME Group Inc.’s decision to raise margins five times over just eight trading days. Between April 25 and May 5, the exchange operator increased silver margins to as much as 12%, or $21,600 per contract, from 6%. Silver tumbled 25%.?

Chart Source: WSJ.com

 

The lack of disclosure riles John Gray, a researcher at EconMatters.com, a website dedicated to economic and market analysis.

“They need to be more transparent,” Mr. Gray said, adding that margins should be a consistent percentage of the contract price, and that exchanges should give more warning of any moves.

Mr. Gray is among market participants who say the CME should have raised silver margins earlier. CME increased once in March, but didn’t make any changes until a month later. Silver prices gained about 30% to $47.151 an ounce between those moves.

“It should have been a red flag to CME when silver crossed the $40 threshold that they needed to raise margins significantly,” Mr. Gray said.

EconMatters additional comment:

Compounding the problem is that brokers also raised their in-house margins on top of the ones CME implemented. Carolyn’s article noted Interactive Brokers “overstepped the exchange twice” in hiking silver margins, while MF Global is another broker, had also charged more margins on silver than what was required by exchanges at the time.  That set off a mass liquidation spilled over even to the other asset classes as well with investors scrambling to cover the newly raised margin requirements.

Ideally, margin requirement should be set by the criteria the Exchange deems proper based on experience and historical pattern, and preferably at a fixed percentage at all time, instead of jumping all over the place as illustrated in the chart above.  So as the price of the underlying commodity goes up or down, a consistent percentage of margin requirements is maintained–i.e. more real-time mark-to-market.

This will help reduce market volatility as traders won’t get caught off guard and be forced to liquidate large positions in order to meet the sudden raised margin requirements.  A fixed percentage also will increase the transparency while keeping the risk of over-leverage in check.

Note – Carolyn’s full article is available here at WSJ.com.

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Goldman Sachs Cuts S&P Target From 1,500 To 1,450

Thursday, May 26th, 2011

by ZeroHedge.com

A month ago, when Goldman, just as we predicted, cut its GDP outlook for Q1 (to be followed by downgrades to both H2 and Q2) we said: “Some other things nobody will be able to predict: Hatzius dropping full year GDP from 4% to 2.25%; Goldman’s downgrade of precious metals, Kostin’s 2011 S&P 500 price target reduction by 20%, and Goldman getting its New York Fed branch to commence monetizing $1.5 trillion in debt some time in October.” One by one all of the predictions are starting to come true: this morning Goldman head market strategist just cut his S&P 500 outlook from 1,500 to 1,450 (granted it is not 20%…yet. There is, however, over 7 more months left in the year). In the meantime, look for the thunderous Wall Street lemmings herd to do the same. Just as we have been predicting on both. Time for CNBC to trot out Laszlo Ultrasound and to advise him to angle the predictive instrument known as a ruler a littler lower: the S&P 2,854 call in 2 years suddenly appears in jeopardy (absent QE7 of course).

From Goldman:

We have lowered our S&P 500 2012 EPS forecast to $104 from $106 and our year-end 2011 price target to 1450 from 1500. At the sector level, the largest changes in our earnings estimates are a $2 increase in Energy 2012 EPS, a $1 decrease  in Information Technology, a $2 decrease in Financials earnings and a smaller negative revision to Consumer Discretionary. We made further minor changes to other sectors that are not large enough to highlight.

And another shocker: Goldman just cut its outlook on S&P margins. A move so obvious we predited it back in November 2010.

We expect S&P margins to contract in 2012, focus on sales growth. The combination of higher commodity prices, lower global GDP growth and rising inflation raises our sales forecasts but lowers S&P 500 expected margins in aggregate. We focus on sectors and stocks best positioned to grow earnings through higher sales. We expect Energy, Consumer Staples and Info Tech to post the highest revenue growth in 2012.

In short:

Our new 3-, 6-, and 12-month price targets: 1400, 1450 and 1500

We forecast S&P 500 will grow sales by 10% in 2011 and 8% in 2012, similar to consensus. But we expect margins will peak at 8.9% this year and slip to 8.8% in 2012. Consensus forecasts margins rise to 9.6% in 2012.

Our commodities strategists forecast 20%+ gains in oil, copper, zinc

We expect a slow but sustained GDP growth environment that will tighten key supply constrained markets and drive prices higher in 2012. Persistent impact of MENA events will push Brent crude to $140/barrel by end-2012.

Stocks with fast sales growth should perform even if margins fade

Firms forecast to generate high sales growth in 2012 are better positioned to absorb rising commodity prices and still post strong EPS gains than companies with average or lackluster sales prospects.

Look for all of the other predictions noted in the first paragraph to come true.

GS Equity 5.26

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Oil and Gas Outlook (David Bouckhout)

Thursday, May 5th, 2011

Apr 29, 2011 (5 minutes)

Crude oil prices have hit levels unseen since the summer of 2008. TD Waterhouse Commodity Strategist, David Bouckhout, discusses the key factors contributing to the climbing price and provides his thoughts on the global supply/demand equation of crude. Bouckhout also shares his outlook for natural gas and the price of oil.

In the interview, David Bouckhout discusses the following points:

  • What is influencing the price of oil?
  • How are high crude prices influencing North American refining margins?
  • Outlook for the price of oil in 2011 and 2012?
  • What energy sectors are likely to benefit from Japan’s nuclear disaster?
  • What should investors keep in mind when looking for an energy opportunity?

Click here or on the image below to view this interview:

 

Copyright © TD Waterhouse

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“Commodity-Rise Impacts” (Schwab Sector Views)

Friday, February 25th, 2011

Schwab Sector Views: Commodity-Rise Impacts

Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research
February 24, 2011

Schwab Sector Views reflect a three- to six-month outlook and are appropriate for investors looking for tactical ideas. We typically update our views every two weeks.

Commodity prices have received a lot of attention during the past several months: from oil and gold, that have been multiyear stories, to the more-recent rise in food-related commodities that has helped fuel unrest in the Middle East. As a reader of our sector views, which are more tactical in nature, you may wonder if there are some near-term sector implications of the rising commodities complex.

Let me unequivocally say … maybe. As we’ve noted before, investing is never a one-factor model and this case is no different. However, we must pay attention to the recent rise in commodity prices, because it can certainly have an impact on our sector calls.

For example, we recently upgraded both energy and materials on our view that economic growth would continue to fuel rising oil, natural gas and metals prices. Now we have to start looking at the other side of the ledger, because the rise in some prices has been so severe that it could threaten the performance of some sectors.

Let me first note that we don’t want to overreact and aren’t making any changes in recommendations this week, but we are watching the following closely for their potential impetus for changes in our views.

For sectors including consumer discretionary, consumer staples, materials and industrials, we’re watching not only the sustainability of the higher input costs, but also the ability of companies in these groups to pass their increased costs on to customers.

Companies have largely been unsuccessful in raising prices during the past couple of years, so margins could be at risk if both the high commodity prices and inability to pass those costs on continue.

For now, wage growth remains stagnant, and given that labor is often the major expense for companies, this helps management maintain profitability. However, we’ll watch for potential changes there.

Additionally, we’re watching the reaction of global central banks to the rise in commodity prices as tightening measures are already being put in place. The danger, of course, is that central banks overreact, pushing the global economy back into recession—which would vastly change our sector outlook. We’re not predicting that will occur, as policymakers are aware of the risks of aggressive tightening, but as global unrest rises, it’s not something we can discount.

Finally, a word of caution about investing directly in commodities. While there may be situations when it’s appropriate, it can also be tricky. First, remember that often when everyone is clamoring to get into something, that’s often a decent time to move the other way.

Second, there are many products designed to provide direct commodity exposure, but many have little track record and can get complicated pretty quickly—plus, liquidity can be an issue in some. If you insist on investing directly in commodities, we strongly suggest doing so with caution and with the appropriate due diligence.

For details on our sector views, please read the expanded analysis below for each sector. As noted above, our recommendations can and do change quickly at times as we continually monitor economic progress and specific factors influencing individual sectors, so check back often.

Consumer discretionary: Marketperform

Bad weather through much of the country throughout the first part of the year continues to make it more difficult to get a good read on what the consumer is doing. However, the personal consumption component of fourth-quarter gross domestic product, along with a couple of consumer sentiment surveys, indicates that the moribund American consumer is a thing of the past—at least for now.

However, that doesn’t mean that spending has returned with abandon—the savings rate remains above 5% and companies continue to point to the price discrimination of consumers as a continuing challenge.

Additionally, unemployment remains stubbornly high, credit standards remain tight, and, as noted, consumers still seem to be intent on saving more and spending less. Combine these issues with the margin-squeezing discounting mentioned above that many retailers had to institute in order to entice shoppers, and you still have a challenging retail environment, leading us to continue to hold the discretionary group at marketperform.

Also, we’re becoming more concerned with the rise in commodity prices, which threaten to not only squeeze margins as passing costs on to customers remains difficult, but also to crimp customers’ ability to spend on discretionary items as more money is spent on such things as food and energy.

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Crispin Odey: Markets Giving Misleading Signals

Thursday, March 5th, 2009

Crispin Odey, CIO, Odey Asset Management, shares a wealth of insight in his 2008 year-end Letter to Shareholders reflecting, in the following excerpts, on the mixed signals the markets are sending about valuations, and commodities. Unlike his former protege and partner, Hugh Hendry, who is avoiding equities for the time being, and long long-term government bonds, Odey likens the current pricing climate in bank shares, “like trading options,” and believes there will be a bear market in bonds within 12 months. Read on:

“Keynes believed that economics was a polemical science. He made economics popular and powerful because he abstracted ideas that in the workaday world looked sensible and showed them to be dangerous if followed by everyone. Thus he changed the way that policy makers and people thought. Has there been a better time to renew the challenge?”

“Given that all of this is a long way away from being accepted we must reluctantly conclude that the world economy is not yet in a recovery position. The recession only started to get into its stride in September of last year. Most companies will have been guilty of over-trading as they have sought to cover falls in orders by accepting any orders. They will be finding themselves with customers going bust and inventory still rising. Profit numbers will be dire. The only good news is that at some point the survivors will be able to charge more for less, and margins will be higher on the other side of this hill”.

“Current investments come about from the outstanding opportunities being opened up by the pain from the falls in share prices that we have seen over the last year. This anguish is sorely felt by us all but it is also the time to be investing. We have become big buyers of the UK clearing banks. This reflects quite how cheap they are. The shares are trading like options. After Northern Rock and Lehman Brothers, many are now convinced that they will be nationalised. However, the government has realised that nothing is solved by nationalising them, and in the UK’s case, that there is everything to be gained from letting them live. In an election year who else has Brown got to blame?”

“Given that on the other side of this disaster these banks can earn multiples of their current share price, the risk/return is wrong. In many ways these purchases remind me of Marconi, when the share price fell to 10p but the lack of covenants on the £4 billion bank loan meant that it could not be bankrupted for four years. We made 450% on that trade. Hopefully these banks will fare better and for longer. Given time and distance they will be fine”.

“This is because the markets have been giving misleading signals for some time. Wheat is a typical example. There is barely any surplus supply over demand in wheat. Yet last year farmers found themselves with rising input costs, thanks to the oil and fertilizer price hikes, and then falling incomes with wheat prices that were some 60% off their highs. They had one of their worst years ever. As a result this year plantings are way down, farmers are distressed and in Brazil and Argentina facing droughts. The wheat price is likely to soar”.

“All in all I expect that within 12 months government bond markets will go into a bear market which may be long and protracted. The stockmarkets remain good value and would prosper after some worries if inflation came back and my portfolio should do quite well in that environment. However it remains hard work in the main”.

Hat tip: Jonathan Davis, Independent Investor

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