Monday, April 22, 2013
Golf and Investing; Belated Thought from the Masters
It's the small things and the boring work - reading public filings or practicing putting - that makes all the difference
Wednesday, April 3, 2013
Friday, March 8, 2013
Unemployment Rate is Down, But Growth is Slowing;Is the Market Out Over its Skis?
Employment numbers are out today and as usual, headlines are focused on the improvement in the overall employment rate to 7.7%, down 20 basis points from last month and 60 basis points y/y.
Construction employment was particularly impressive, up 2.9% y/y (NSA), with strength in all major areas including Heavy Civil (+4.6%), Residential (+3.4%), Arch / Eng (+2%) and Non-Residential (+1.9%).
However, as the charts show below, growth rates are slowing for all but one major end market that uses constructed facilities. These end markets account for 85% of Total Non-Farm employment.
Y/Y changes in employment by sector last 12-mos vs prior 12-mos (click to enlarge)
Construction employment was particularly impressive, up 2.9% y/y (NSA), with strength in all major areas including Heavy Civil (+4.6%), Residential (+3.4%), Arch / Eng (+2%) and Non-Residential (+1.9%).
However, as the charts show below, growth rates are slowing for all but one major end market that uses constructed facilities. These end markets account for 85% of Total Non-Farm employment.
Slowing growth means employment trends appear unlikely to break through old highs from five years ago. With the market breaking through old highs but employment growth waning, I question whether Mr. Market is out over its skis on the continued strength of this recovery, particularly given the brevity of the US "Manufacturing Renaissance".
Y/Y changes in employment by sector last 12-mos vs prior 12-mos (click to enlarge)
Monday, February 18, 2013
My client relationships are like my marriage
A great compliment from a client: "The minute I disagree with your competitors, the conversation stops. But the minute I disagree with you, the conversation starts." I think that reflects my 10-years married to an attorney.
Friday, February 15, 2013
More Sell Side Layoffs ...
Last week a "bulge bracket" investment bank laid off its 3-person team of analysts covering the same industry - Engineering & Construction - that I covered at my last job. It was part of a headcount reduction that included several teams of analysts. The labor trend on the street, while unfortunate for me and my peers, validates my views ...
There are way too many analysts on the street. Wall Street cannot continue to support the headcount and infrastructure with trading commissions at a few cents a share. The situation has baffled me since I graduated business school.
There are way too many analysts on the street. Wall Street cannot continue to support the headcount and infrastructure with trading commissions at a few cents a share. The situation has baffled me since I graduated business school.
The sell side work is not viewed as value add. The concierge stuff, the management visits, the race to be the first to re-write an earnings release and the models with 15% CAGR always hewing close to guidance, is a race to the bottom in my opinion, and that always ends with a bump.
Where the sell side converges with entertainment and media, it becomes a slippery slope. Being a talking head on TV is fun and it reinforces the image of importance, but it's not necessarily the best way to deliver information to clients.
... it took OTB 20 years after the advent of the Internet to go out of business and it will take institutional equity research at least that long to follow suit if it continues its race to the bottom.
However, I think it can avoid that same fate by leading with its strengths ...
However, I think it can avoid that same fate by leading with its strengths ...
It is legal. Wall Street sell side is research is highly regulated. You will not end up doing the perp walk talking to a Wall Street analyst as you might using the "expert networks" or other off Wall Street research.
It scales. An industry expert can attend a conference, talk to sources, be intimate with management, its personalities, its self identities, understand its drivers and passions, and give clients perspective and history faster than a buyside client can replicate that on their own.
Over time, analysts become experts and this cannot be automated or quickly replicated. The value of an analyst comes from their ability to understand the nuances of the business via independent research, so they can verify what management is saying, ask questions on behalf of shareholders and provide perspective to clients.
... there are many good analysts on the street doing great thinking and great research on industries, companies and their valuations. But so much is drowned out and crowded out by news and noise.
The business I think would do well to get back to its roots as a sleepy profession one step up from accounting (apologies to accountants, but you're all preparing taxes now anyway). And better still if it could devolve a bit away from earnings notes and 6AM starts and other artifacts of the FAX days, and just focus on the perspective and information that clients need to make better decisions about the thousands of stocks they cover in their funds.
The business I think would do well to get back to its roots as a sleepy profession one step up from accounting (apologies to accountants, but you're all preparing taxes now anyway). And better still if it could devolve a bit away from earnings notes and 6AM starts and other artifacts of the FAX days, and just focus on the perspective and information that clients need to make better decisions about the thousands of stocks they cover in their funds.
Thursday, December 6, 2012
Biggest drag on economy? Policy uncertainty and congressional dysfunction
I awoke this morning to the yawning fear that Congress will change the tax policy, and then change it again, and again, and again. The thought of this Congress changing tax policy - the current Congress - the dysfunctional and partisan Congress said by many executives to be the most divisive in their memories, frightens me.
This Congress has been unable to pass any long term measure; no environmental policy, no energy policy, only a short-term 2-year infrastructure policy. So adding more uncertainty about another long term policy - tax policy - is bound to make matters worse for those planning to make investment decisions. And uncertainty leads to deferred investment decisions, which is a drag on the economy.
The largest investment decisions for most people is buying or renting a car or a home. For Americans in the middle 60% of income - i.e. not the lowest or highest 20% - a home represents 40% to 50% of their entire asset base. And part of the financial decisions of whether or not to buy a home is driven by the mortgage interest deduction. If you borrow money to buy a home, you pay interest on that debt. If you itemize your taxes, you can deduct that interest from your total taxable income, reducing taxes by a few thousand dollars every year.
Individual investment decisions are hardly the backbone of the economy. Private and public institutions and corporations also make investment decisions - decisions to build a road or hospital, a wind farm or a hydrogen plant, a stadium or a condominium - all based on expectations of long term policies. But changing the policy could impact home purchase decisions and therefore the value of the single largest asset for most American families.
And that's the fear, that there will be a change this year, and then next year, and then the year after, as each divisive Congress aims to benefits its principal constituencies. It's impossible for investors to invest over the long term when there is no clear sight on policy.
Municipalities can't build new large infrastructure if they don't know how much federal funding they will receive on their investment. Utilities can't build new power plants if they don't know long-term environmental policy. Chemical companies can't build new processing facilities if they don't know how policy will impact the availability of natural gas.
We can't possibly move beyond an oil or gas-based energy system without a long term 30- or 50-year plan. The so-called Solyndra scandal wasn't a scandal so much for the government's loan guarantees as it was from the lack of any long-term energy policy, which stymied demand for the facilities products.
Businesses will adapt to whatever long term policy you put in front of them. That's what entrepreneurs do. Entrenched businesses fight tooth and nail to keep whatever policies are in place in order to maintain their advantages. Growing businesses aim to change policy so they can grow faster and more profitable in the short term (think Citicorp and Glass-Steagal. With Citigroup laying off 11,000 workers, I'm sure re-instating Glass-Steagal would give current executives the cover to split up their businesses).
But with uncertainty, who benefits beyond the advertisers on the Sunday morning news programs?
This is why Congress needs to get in gear and set some long term rational and realistic policies and let businesses figure out how to profit from them. Unfortunately, until the attitude in DC changes, "long-term" is an election cycle, if not a media cycle. When policies set one year are reversed four years later, businesses can't make rational long-term investment decisions. And without long term investment decisions, businesses will merely lever up for financial not strategic investments.
When Congress can act in the long term best interest of the country to motivate investment in long-term tangible assets - roads, parks, manufacturing, energy processing - then they can refocus on long term intangible assets like life, liberty and the pursuit of happiness, not short-term media-cycle bickering that defines our current leadership.
This Congress has been unable to pass any long term measure; no environmental policy, no energy policy, only a short-term 2-year infrastructure policy. So adding more uncertainty about another long term policy - tax policy - is bound to make matters worse for those planning to make investment decisions. And uncertainty leads to deferred investment decisions, which is a drag on the economy.
The largest investment decisions for most people is buying or renting a car or a home. For Americans in the middle 60% of income - i.e. not the lowest or highest 20% - a home represents 40% to 50% of their entire asset base. And part of the financial decisions of whether or not to buy a home is driven by the mortgage interest deduction. If you borrow money to buy a home, you pay interest on that debt. If you itemize your taxes, you can deduct that interest from your total taxable income, reducing taxes by a few thousand dollars every year.
Individual investment decisions are hardly the backbone of the economy. Private and public institutions and corporations also make investment decisions - decisions to build a road or hospital, a wind farm or a hydrogen plant, a stadium or a condominium - all based on expectations of long term policies. But changing the policy could impact home purchase decisions and therefore the value of the single largest asset for most American families.
And that's the fear, that there will be a change this year, and then next year, and then the year after, as each divisive Congress aims to benefits its principal constituencies. It's impossible for investors to invest over the long term when there is no clear sight on policy.
Municipalities can't build new large infrastructure if they don't know how much federal funding they will receive on their investment. Utilities can't build new power plants if they don't know long-term environmental policy. Chemical companies can't build new processing facilities if they don't know how policy will impact the availability of natural gas.
We can't possibly move beyond an oil or gas-based energy system without a long term 30- or 50-year plan. The so-called Solyndra scandal wasn't a scandal so much for the government's loan guarantees as it was from the lack of any long-term energy policy, which stymied demand for the facilities products.
Businesses will adapt to whatever long term policy you put in front of them. That's what entrepreneurs do. Entrenched businesses fight tooth and nail to keep whatever policies are in place in order to maintain their advantages. Growing businesses aim to change policy so they can grow faster and more profitable in the short term (think Citicorp and Glass-Steagal. With Citigroup laying off 11,000 workers, I'm sure re-instating Glass-Steagal would give current executives the cover to split up their businesses).
But with uncertainty, who benefits beyond the advertisers on the Sunday morning news programs?
This is why Congress needs to get in gear and set some long term rational and realistic policies and let businesses figure out how to profit from them. Unfortunately, until the attitude in DC changes, "long-term" is an election cycle, if not a media cycle. When policies set one year are reversed four years later, businesses can't make rational long-term investment decisions. And without long term investment decisions, businesses will merely lever up for financial not strategic investments.
When Congress can act in the long term best interest of the country to motivate investment in long-term tangible assets - roads, parks, manufacturing, energy processing - then they can refocus on long term intangible assets like life, liberty and the pursuit of happiness, not short-term media-cycle bickering that defines our current leadership.
Wednesday, September 5, 2012
Sell side research is dead; long live the sell side
The environment for sell side research is distinctly negative. Comments I hear when networking for work: "This is a business in secular decline." ... "Can't sustain the number of analysts with penny per share commissions" ... "the traditional model is broken" ... "all the smart people have moved to the buyside" ... "the sooner this moves to a subscription model the better" ... "regulations have killed the business" ... "correlation has killed the business" ... "high frequency trading has killed the business".
The contrarian in me says this must be best time to go into sell side research, but that's an irrational knee jerk response; the traditional business model, where information is indirectly paid for with trading commissions and banking revenues, has been broken for a long time. Whether or not the sell side requires two high-fixed cost businesses - banking and trading desks - to drive compensation ought to be reconsidered.
Three reasons why there is still value in good sell side research and why it could stand on its own as a subscription model:
1) Incremental information is still valued. It's harder to find - the analyst can't just ask management for it - but that just makes it more valuable. You have to walk around asking for it, everywhere.
2) It's expensive to find incremental information, but it scales well. The buyside, particularly smaller shops, can't afford to do the work. Travel and conferences are expensive. Cultivating sources is time consuming. Tracking projects and performance is tedious. The ability of a good sell side analyst covering one industry as the eyes and ears on the ground, feeling the pulse of an industry, and offering tidbits and perspective, can't be replicated by a buyside analyst covering 10 industries.
3) Sell side could do a better job turning regulations into a marketing point. While a client faces regulatory risk using expert networks, that risk declines using regulated sell side research. When it rains, it rains on everybody so why not sell an umbrella?
Unfortunately, organizations tend to be inherently slow to evolve and risk averse. It is unusual - in fact quite amazing - when institutions, corporations or sports teams, outperform their peers on the basis of good decisions over extended periods. Dynasties are rare. When it happens, its because they evolve, something the traditional sell side model has resisted for far too long.
The contrarian in me says this must be best time to go into sell side research, but that's an irrational knee jerk response; the traditional business model, where information is indirectly paid for with trading commissions and banking revenues, has been broken for a long time. Whether or not the sell side requires two high-fixed cost businesses - banking and trading desks - to drive compensation ought to be reconsidered.
Three reasons why there is still value in good sell side research and why it could stand on its own as a subscription model:
1) Incremental information is still valued. It's harder to find - the analyst can't just ask management for it - but that just makes it more valuable. You have to walk around asking for it, everywhere.
2) It's expensive to find incremental information, but it scales well. The buyside, particularly smaller shops, can't afford to do the work. Travel and conferences are expensive. Cultivating sources is time consuming. Tracking projects and performance is tedious. The ability of a good sell side analyst covering one industry as the eyes and ears on the ground, feeling the pulse of an industry, and offering tidbits and perspective, can't be replicated by a buyside analyst covering 10 industries.
3) Sell side could do a better job turning regulations into a marketing point. While a client faces regulatory risk using expert networks, that risk declines using regulated sell side research. When it rains, it rains on everybody so why not sell an umbrella?
Unfortunately, organizations tend to be inherently slow to evolve and risk averse. It is unusual - in fact quite amazing - when institutions, corporations or sports teams, outperform their peers on the basis of good decisions over extended periods. Dynasties are rare. When it happens, its because they evolve, something the traditional sell side model has resisted for far too long.
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