Avondale Asset Management

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Moving on Up!

noreply@blogger.com (Scott Krisiloff) — Fri, 15 Feb 2013 22:22:00 +0000

Avondale is moving! We are joining the stocktwits blog network to pair up with some of the best financial bloggers on the internet.

As a result, our blogspot address (avondaleassetmanagement.blogspot.com) will no longer be updated. Please visit us from now on at www.avondaleam.com

The Swiss National Bank's Currency Peg

noreply@blogger.com (Scott Krisiloff) — Tue, 12 Feb 2013 18:43:00 +0000

Between the Yen and the Euro, the foreign exchange markets have seen some excitement in recent months. One currency cross that has been anything but exciting though has been that of the Euro against the Swiss Franc (EUR/CHF). After a rapid depreciation of the Euro during the heart of the European Financial Crisis, the Swiss National Bank decided to explicitly peg the Swiss Franc at 1.20 EUR/CHF. The SNB had maintained a "soft peg" up until that point by purchasing EUR in the open market, but the explicit peg was needed to stop the appreciation.

Below is a chart of the evolution of the SNB balance sheet as it has tried to stop the CHF from appreciating. The balance sheet has expanded by nearly 5x and foreign currency now represents almost 90% of the bank's assets. As a result, the CHF has effectively become backed by the Euro.

Where do Growth Stocks Peak?

noreply@blogger.com (Scott Krisiloff) — Mon, 11 Feb 2013 19:49:00 +0000

Over the course of the recent bull market there have been a few growth stocks that have hit extreme levels only to come crashing down. Although some of these have recovered slightly, those that come to mind include: NFLX, GMCR, OPEN, MNST and CMG.

As a post-mortem on these stocks, below is a chart of the price to sales multiples that they hit at their highest levels. For comparison I included the peak price to sales multiples of five stocks that had similar sentiment (judged subjectively) at the 07 peak and five from the dot com era. Also included are the current multiples of six growth stocks that haven't slowed since 2009.

Note: red bar is the average multiple for the group

Total Fiscal and Monetary Stimulus Since 2008

noreply@blogger.com (Scott Krisiloff) — Mon, 11 Feb 2013 16:26:00 +0000

As many are hopeful that we are finally leaving the financial crisis behind, sometime in the not too distant future the government is going to have to start unwinding the major stimulus that it has provided to the economy through fiscal deficits and monetary expansion since the crisis began.

Below is a cumulative tally of how much stimulus has come from the Fed and Treasury over the last four years. The total is now about $7T ($5T worth of deficits plus another $2T worth of monetary expansion). Amazingly, to the extent that one believes that the crisis was primarily housing market related, the $7T total represents ~70% of all the mortgage debt outstanding in 2008.

Cumulative deficit plus change in size of Fed balance sheet since 9/2008

Finance Website Web Traffic Comparison

noreply@blogger.com (Scott Krisiloff) — Fri, 08 Feb 2013 20:15:00 +0000

Below is a comparison of the web traffic rank of some of the most popular finance sites on the web. The list was formulated simply based on websites that came to mind, so it's highly probable that I missed some high traffic sites in here somewhere. CNN money, yahoo finance and google finance are also three big finance sites that would make the list which can't be extracted from their larger parent sites.

For all the fragmentation of news that the web has caused, the big guys still get the most traffic. Business insider is the lone new-media entrant which has competitive traffic numbers to Forbes, etc. The only true blog that makes this list is zerohedge. The average big name finance blog has a rank between 20,000 and 200,000.

Monetary Base Breaks Out

noreply@blogger.com (Scott Krisiloff) — Fri, 08 Feb 2013 02:49:00 +0000

Data released by the Fed today confirmed that the Monetary Base has officially risen above the range that it had settled in since July of 2011. Since roughly the same time period brent crude oil and gold have also been stuck in a prolonged sideways move, although in recent weeks crude has also begun to turn higher along with the base.

Is AAPL's Loss GOOG's Gain?

noreply@blogger.com (Scott Krisiloff) — Thu, 07 Feb 2013 19:03:00 +0000

Although GOOG refuses to directly monetize its dominant position in mobile, one might expect that any lost market cap for AAPL might be gobbled up by GOOG because the two are an effective duopoly in smartphone operating systems. Below is a chart of the change in market cap for AAPL and GOOG since November 16. Since then GOOG has gained $40B in market cap as AAPL has lost $65B.

Note: I chose to start the chart on November 16 rather than AAPL's September high because that's when the S&P 500 bottomed after a 5% pullback. I reasoned that this time period was less influenced by beta.

Nikkei Long Term Chart

noreply@blogger.com (Scott Krisiloff) — Thu, 07 Feb 2013 18:18:00 +0000

In concert with the Yen's 20% depreciation since October, the Nikkei has rallied 35% over the same time period. It's a large move to be certain, but, also like the Yen, in the context of the index's long term chart, it is almost inconsequential. Below is a chart of the Nikkei since 1984. The index is still 70% below its all time peak set in 1989 and 35% below it's 2007 peak. Of course, if one were to price the index in dollars the picture would be slightly altered, but the value destruction is inescapable.

February 2013 Investor Letter

noreply@blogger.com (Scott Krisiloff) — Wed, 06 Feb 2013 21:58:00 +0000

Below is a letter that is written monthly for the benefit of Avondale Asset Management's clients. It is reproduced here for informational purposes for the readers of this blog.

Dear Investors,

So far 2013 has unfolded mostly in line with the expectations voiced in last month’s letter. Valuation, stimulus and sentiment have combined to give the market a generous boost to start the year. The S&P 500 was up 5% in January which, like last year, was the best January since 1997.

In last year’s February letter I pointed out that a good January has historically been a good sign for the rest of the year: “Since 1957 there have been 18 times that the S&P 500 was up 4% or more in January. In those 18 years, the S&P was up an average of 21%, and returned double digits for the full year 17 out of 18 times.” I wrote then that these statistics were encouraging, but that a high single digit to low double digit return was more likely for 2012. This year I am inclined to believe that the S&P 500 could be up 20% at some point mid-year, but it would be surprising to me if it held on to close the year at that level.

It is worth noting that the Dow, which has a longer history than the S&P 500, also shows strong returns in years with a large gain in January. However, 1914, 1929 and 1987 were also all years with big gains in the first month. These years have the unfortunate distinction of being ones in which the Dow had its three worst days in history, all of which came in the last few months of the year. That’s not to say a crash is likely, but it is something to keep in mind should markets become over-extended as the year goes on.

For now, investors aren't spending much time thinking about negative scenarios. As the year started, people were still gloomy about the prospects for 2013, but one month into the year the mood has gotten much more optimistic much faster than I expected. Signs of optimism are numerous: flows into equity funds were the largest in a decade, negative economic reports have had little effect on the market, the Euro has recovered back to €/$1.35, and even the US Congress is getting the benefit of the doubt. After years of constant crisis people seem ready to take risks again, including CEO's, who have been very upbeat on recent conference calls.

When investors become this bullish, it means that it’s important to act cautiously. Rapidly rising prices are warning signs that price insensitive investors have entered the markets. They bring with them the opportunity to sell at higher than reasonable prices, but also introduce added volatility.

This is an uncomfortable circumstance for investors who are price sensitive, but it’s not yet time to sound the alarms for two principal reasons. 1) Valuation is becoming stretched but not necessarily extreme. My work at the individual stock level suggests that the average stock could rise another 20% before valuation makes no logical sense. 2) I suspect that most of the new found bulls are really bears in bull clothing ready to turn on the market at a moment’s notice. We’re not quite at the level where there is unanimous belief in the bull, which is typically the final phase of a bull market.

Still, such positive sentiment does increase the chances that there could be short term pullbacks over the next few weeks and months. Markets never rise in a straight line and so mild corrections are within normal expectations. Absent unique opportunities, we are unlikely to be large buyers of stocks for the time being. We continue to be happy to sell at the right prices.

Scott Krisiloff, CFA

Opinions voiced in the letter should not be viewed as a recommendation of any specific investment. Past performance is not a guarantee or reliable indicator of future results. Investing is subject to risk including loss of principal. Investors should consider the suitability of any investment strategy within the context of their personal portfolio.

CPI Adjusted S&P 500

noreply@blogger.com (Scott Krisiloff) — Wed, 06 Feb 2013 18:08:00 +0000

As the S&P 500 continues to approach its former all time high, below is a long term chart of the index adjusted for CPI. While we're not too far from the 2007 highs on a nominal basis, the index is still about 11% lower than it was in 2007 on a CPI adjusted basis and 25% lower than the all time high reached in 2000. The armchair technician in me has drawn a line to point out that we're approaching inflation adjusted resistance.

US Post Office Volumes

noreply@blogger.com (Scott Krisiloff) — Wed, 06 Feb 2013 16:26:00 +0000

The USPS made news today by announcing that it would stop delivering mail on Saturdays. The postmaster general made an interesting comment on CNBC this morning that part of the problem is that the cost of postage can't be raised by more than the rate of inflation. Still, it's tough to maintain profitability in any business when volumes look like the chart below. Since 2000 the number of first class letters handled by the USPS has fallen by 33% to 68 billion. I wonder how much of what's left is junk mail...

I hadn't realized this before, but the post office actually files a 10-K which can be found here. Below is the income statement pulled from the filing.

Is the Yen Crashing?

noreply@blogger.com (Scott Krisiloff) — Tue, 05 Feb 2013 18:53:00 +0000

Considering the magnitude of the move, the Yen's recent depreciation vs. the dollar has garnered surprisingly little attention. Since September the Yen has gone from USD/JPY 77 to 93. That's a 20% decline from peak to trough, which is a relatively extreme move for a currency. Below is a rolling three month change chart for the Yen going back to 1971. This is the 2nd largest three month move for the Yen in that time frame.

By comparison, the largest 3 month decline for EUR/USD was 20% in 2008 under the stress of the financial crisis. During the heart of the European financial crisis in 2010/2011, as the world worried that the Eurozone would collapse, the most that the currency depreciated versus the dollar was 13% in a three month period.

McGraw Hill Market Cap Decline

noreply@blogger.com (Scott Krisiloff) — Tue, 05 Feb 2013 15:37:00 +0000

Efficient market theorists should take note that MHP's market cap has fallen by $3B in the last two days on news that the Federal government is suing the company. For reference BP's settlement with the Justice Department was $4B. Given that McGraw Hill was arguably complicit but not the direct cause of structured credit blowups, it's difficult to see how any settlement could reach multi-billion dollar territory.

Sector SPDR Snapshot

noreply@blogger.com (Scott Krisiloff) — Mon, 04 Feb 2013 16:50:00 +0000

Below is a snapshot of how the Sector SPDR ETFs have performed since 2003. As the S&P 500 approaches its 2007 high (perhaps not today) four of the sectors have already made new all time highs. Consumer Staples (XLP), Healthcare (XLV), Consumer Discretionary (XLY) and Tech (XLK) have powered much of this bull market, although Tech (XLK) has not made it past its September high. Thanks to the dilution in the financial sector it may be a very long time before XLF reaches its former peak.

Click to Enlarge

Cities With Multiple Pro Sports Champions in the Same Year

noreply@blogger.com (Scott Krisiloff) — Fri, 01 Feb 2013 21:50:00 +0000

No market analysis here, but thought it would be interesting to point out that if the 49ers win on Sunday it will be the 14th time in history that a city holds two pro sports championships at the same time. Below are the other 13 times that it's happened.

Since the Super Bowl only started in 1967 the years in red are the multi-championship years that hold up in the modern era. While I'm at it, I should probably put an asterisk next to 2002 as well though. The Angels are from Anaheim, not Los Angeles.

Source: Wikipedia

S&P Annual Performance After a Big January

noreply@blogger.com (Scott Krisiloff) — Fri, 01 Feb 2013 15:43:00 +0000

This is an update to a post that I first wrote last year, the last time that the S&P 500 had a big rise in the first month of the year.

When the S&P 500 has a good first month, it has statistically been followed by a really good year. The index has risen by more than 4% in January 18 times in its 56 year history. In those years it has averaged a 21.1% return for the full year, and it has been up double digits in every one of those years except for 1987 (which was a good year up until the October crash).

The S&P 500 has never been negative in a year with a big January, but it's worth noting that if a similar analysis is performed on the Dow, which has a 118 year history, there are five years (out of 28) that the index was up more than 4% in January and ended negative for the year. Many of those years were significantly negative too: the average loss was 18.4% and the list includes 1914, 1929 and 1930. The index ended those years down 30.7%, 17.2% and 33.8% after being up 5.1%, 5.8% and 7.5% in January respectively.

Weird eerie coincidence, the Dow has had a daily crash three times in its history: in 1914, 1929 and 1987. All three years had big Januaries.

Earnings Call Notes 1.31.13

noreply@blogger.com (Scott Krisiloff) — Fri, 01 Feb 2013 01:36:00 +0000

Below are quotes from an assortment of recent earnings calls--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of. Complete transcripts can be found at Seeking Alpha.

Banco Santander (SAN)

capital ratios rising for the sixth year running up to 10.33%. loan-to-deposit ratio is now below 100%

we have assigned since the beginning of the crisis over EUR 23 billion to specific provisions for loan losses and real estate, which account for 10% of our total loan portfolio in Spain.

As for our NPL ratios, the group ratio was 4.54%

And if we look at lending, lending fell overall by 6%, but big differences between segments. real estate purpose fell 32%; the individual household mortgages and consumer loans down 7% due to household deleveraging...reasonably stable lending to companies and to the public sector...balances with large corporates have fallen, too...because of continued deleveraging by corporates.

Brazil, the macroeconomic environment has been quite different to what we expected and what the market expected...Growth on GDP was of about 1%....we think that is going to pick up in 2013 and grow at about 3%. Interest rate at historic growth, 7.25% and inflation almost 6%.

In Spain, the recapitalization of banks and the private sector adjustment already completed

In short, we believe that the worst part of the cycle is already over. Realistic exposure is fully provisioned.

Whether we plan to repay anymore or return anymore [of the LTRO], we are using as cushion basically or insurance...So the decision of whether to repay any more or return any more, well, the answer would be probably, yes. But it will depend on the evolution of the markets and the impact on our income statement, well, it costs 75 basis points...And the liquidity buffer had a negative impact on our income statement

Southern Company (SO)

We continued the ongoing transformation in our generation mix, generating more energy from natural gas than coal for the first time in our history

our kind of color on where we believe the economy is headed is slightly more bullish than we were, say, in the third quarter. We are expecting a backend loaded economic recovery but I feel pretty good about it right now based on what we see.

energy efficiency has almost no influence on the consumption of our customers. 88% or so of usage can be explained by either the income growth of our customers, the price of our product and weather.

We all have these goofy devices. We all have iPads and iPhones and bigger plasma TVs and everything else and when we see the progression that people are moving from small homes to apartments into you now primary housing, we see a growth in square footage per person...All of these things contribute to usage growth

if the final rule is anything like the proposed rule, conventional coal generation is just not doable...I go back to the families we serve, 48% of which make 40,000 or less, those folks make tough kitchen-table economic decisions every day. Their demand for energy is relatively inelastic, and so anything the EPA does which adds cost to energy tends to slow down our economic recovery

Dow Chemical (DOW)

wet shale gas dynamics are fundamentally changing the game for integrated North American based producers like Dow. This is clearly evidenced by operating rates in the United States and Canada being in the 90s, while Asia and Europe have been in the 70s.

as global demand outstrips supply in the next few years and world GDP gains further traction, we anticipate operating rates higher than 90% leading to substantial margin expansion, a double peak, so to speak.

Dow's feedstock flexibility will allow us to continue to pivot so that we continue to take advantage of our uniquely advantaged feedstock slate and we are building on this advantage.

Time Warner Cable (TWC)

Our programming costs per subscriber has grown 32% in the last 4 years

Our residential video ARPU increased 16% over that same period, so we've effectively raised pricing a little faster than inflation but only half as fast as programming costs have risen.

ARPU per customer relationship, which increased 4% over last year and is approaching $120 per month

We do not pretend that these deals [i.e. the Dodger's deal] are inexpensive or cheap. And our sense is that if we're going to carry these games, they're going to be expensive when we get them. So what we think we've done with these deals is to minimize and stabilize the cost over a long time period.

On Google in Kansas City: The reality is, today, there are not really applications that require 1 gigabit per second.

Qualcomm (QCOM)

this brings 3G penetration to 29% in China, so excellent progress and still plenty of opportunity ahead

our design pipeline continues to grow. There have been more than 600 Snapdragon-based devices announced and another 170 plus devices announced based on our Qualcomm Reference Design solutions.

we are seeing more efficiency in the 3G, 4G inventory channel as the industry continued to move toward an open retail channel versus a carrier centric channel

We are reaffirming our estimate for calendar 2013 3G, 4G device shipments of between 1 billion and 1.07 billion units, up approximately 8% to 15% year-over-year

UPS (UPS)

in the U.S, we were off to a surprisingly strong start in January

Holiday retail sales came in slightly below expectations but UPS still hit a new high, delivering over 500 million packages globally during peak season.

On our peak air day, Christmas eve, UPS delivered over 8 million air packages, more than 2.5 times our normal air volume and over 1 million pieces more than last year.

UPS annual revenue of $54.1 billion was our highest ever, as were the 4.1 billion packages we delivered globally.

I think that overall we still see 2013 as a slow growth economy.

Facebook (FB)

We started off the year with no ads at all on mobile and we ended up with approximately 23% of our ads revenue coming from mobile in the fourth quarter.

Marketers are realizing more and more that Facebook is one of the best places to reach their customers on mobile because of our unique ability to reach specific target audiences at scale.

our total expenses, excluding stock comp, will likely grow by somewhere around 50% in 2013

Paccar (PCAR)

PACCAR's retail share of the U.S. and Canadian Class 8 truck market was 28.9% and DAF's share of the European above 16-tonne market was 16%

Looking at the truck market overall in 2013. The U.S. and Canadian Class 8 industry retail sales are estimated to be in the range of 210,000 to 240,000 units. In Europe, the "greater than 16 tonne" truck market is anticipated to be in the range of 210,000 to 250,000 units.

Natural gas will be a factor, but at this time it's a pretty small factor. We'll just have to see over time how the infrastructure shakes out

Core Labs (CLB)

Yeah, Jeff, we actually don't think that the shale plays are well understood at this point. Just over the last couple of quarters, we have been able to determine through our fracture diagnostics technology that additional stages, closer spaced, so you have more in greater contact with the reservoir phase is going to proliferate more stages and more closely space stages.

We believe that currently there are only one or two countries that have spare capacity and that amount is fairly limited. If we get some robust economic growth around the world, we are going to see crude prices, Brent prices right back at $150.

Q: perhaps two substantial liquids discoveries yet to be made or announced in North America, can you give us a feel for when we might, the mystery might go way? A: Well, that’s up to our clients, acreage positions are being taken and I got a fairly, once of the acreage positions are established as which happened in the Eagle Ford and then in the Utica announcements will be made. So it’s not up to us, its up to our clients.

Conoco Phillips (COP)
We ended 2012 with just over 8.6 billion BOE of reserves, up 3% overall compared to 2011. Importantly, we added 942 million net BOE of reserves organically resulting in an organic reserve replacement rate of 156%

I think as we look out and think about the future opportunity, I think with this unconventional revolution that we are seeing in North America right now, and some of the technology advances in the deepwater arenas that are becoming pretty perspective. It’s kind of in my view turn from a bid of resource scarcity that was leading to a lot of merger synergies over the last 10 or 12 years and resource capture into a view now...we just think that growing organically, there is the opportunity set to go do that and the option value associated with growing organically is, we thought better in our portfolio then trying to do that through an M&A channel, or some resource access that way.
Viacom (VIA)

the consistent refrain we hear from our audiences is that they want new shows and new episodes in faster cycles, and so we are delivering at all our networks, accelerating development timelines and production to accelerate our ratings turnaround.

original programming that’s new and exclusive to us where we own all the rights and we think that is going to be critical as you move into the future where this program lives across platforms and around the world.

we have content on platforms like Netflix and Google. The growth of streams of our content far outpaces the growth of subscribers that they have

Under Armour (UA)

In our IPO year of 2005, compression represented 64% of our apparel mix. This past year, that compression number was down to just 14%.

we want to go back to this concept around cluster marketing, and the idea there is to create holidays. So holidays are places where based on the entire brand meets at once. What we want to do is consolidate our spend to tighter, but louder messaging

Cullen/Frost Bankers (CFR)

For the year, return on average assets and equity were 1.14% and 10.03%...average total deposits were $17.3 billion, up 13.6%...average loans were up 11.2%

It’s really nice when you’re growing this strong organically. Just to put it in perspective, the biggest bank we ever bought was about a $1 billion. And today, we’re growing at a rate of about $2 billion a year. So this organic is getting better.

You don’t just go make the first call and get the loan...We know that the work we do today is going to payoff about a 120 days from now.

you’ll see a juvenile delinquent come in [to our markets] every now and then, and that juvenile delinquent doesn’t mean a little bank. It means, usually the too-big-to-fail will come flying in with some crazy pricing.

Bank of Hawaii (BOH)

We had a record number of visitors to Hawaii this year and visitor spending reached a record-high of 14.3 billion that's up over 18% for the year. most of that increase coming from our International segment.

Year-to-date return on assets was 1.22% and return on equity was 16.2%. Our year-to-date efficacy ratio was 57.9%, a reduction from 59.2% in 2011. Earnings per share was up 8.3% in 2012. Loans grew 5.7%. Shareholders equity grew 1.9%.

Callaway (ELY)

From a market share basis, through November our US hard goods market share declined to 14.4% versus 15.6% in 2011

what’s occurred between 2007/2008 and the current somewhat compressed gross margins is rising costs out of Asia where we source most of our products, and an increase in the amount of technology in the products such as adjustable drivers and other technologies that in many instances are being sold at the same price points that we’re popular in the market in 2007/2008. So those factors are real in our industry as candidly they are in all industries, and we have to work through those.

Hershey (HSY)

Halloween results were in line with expectations. The late October storm that affected the East Coast did not have a material impact on our overall Halloween results.

Oil Priced in Yen vs. Dollars

noreply@blogger.com (Scott Krisiloff) — Thu, 31 Jan 2013 15:44:00 +0000

The USD/JPY exchange rate has risen to ¥91 from ¥77 as Japan seems intent on creating inflation for itself by depreciating its currency. Thanks to that depreciation oil priced in yen is rising even as it is relatively flat when priced in dollars. Success?

Brent crude price

Earnings Call Notes 1.30.13

noreply@blogger.com (Scott Krisiloff) — Thu, 31 Jan 2013 01:29:00 +0000

Amazon (AMZN)

There is not a lot I can comment on in terms of our plans similar to last year no as we progress through the year, we can give you further updates on what we plan to do there....

there's not a lot more I can add to it...

just stay tuned and we will let you know as the year progresses...

we will continue to expand our footprint over time ...Beyond that there is not a lot I can add...

we haven’t given a lot of detail but I think one thing certainly to look at...

I can't give you specific numbers but we have seen very good progress...

I can't give you specific for attach rates but the business is making good progress...

I do not have a specific number for you there, but yes...

We will continue to add selection on the Instant Video. Beyond that, you have to stay tuned...

There are not a lot of specifics. We have long been in the practice of not talking about trends in within the quarter in terms of year-over-year growth or anything like that...

we haven't broken out the first-party versus third-party units since it's something we have done for that's only I am today or we have done in previous calls, so it's not I can help you with there...

There's not a lot I can specifically talk about as it relates to LivingSocial ...

Boeing (BA)

commercial airplane deliveries was 601 delivered, the most since 1999, and the second-most in commercial aviation history.

we also led the industry in net new orders, with 1,203, the second highest total in our company’s history

Our commercial backlog of nearly 4,400 airplanes totals a record $319 billion

Nearly two-thirds of our order book is with customers outside the U.S. and Europe

For the quarter, we delivered 23 787s, reaching a total of 46 for the year

doubling 787 production, increasing the rate from two airplanes per month to five per month

final assembly build rate to seven per month in mid 2013 and 10 per month by late 2013
The 737 production rate will increase to 38 per month in the second quarter of this year and then move up to 42 per month in the first half of 2014.

Jones Lang LaSalle (JLL)

while capital values continue to increase in most major markets around the world compared to the prior year, the rate of growth has slowed in a number of key markets.

The vacancy rates across 98 global markets remain stable in the fourth quarter at 13.2% as vacancy declines in the U.S. and Europe were offset by increases in Asia Pacific. Prime rental growth slowed in the quarter, increasing 2.1% year-on-year, while Beijing, Sao Paulo, Mexico City and San Francisco recorded the strongest rental growth in 2012 while demand falls, so prime rent decreased furthest in Hong Kong, Singapore, Paris, Madrid and Brussels.

institutional investors are maintaining and, in many cases, increasing their allocations to real estate, attracted by returns that compare favorably to other investment options.

Robert Half (RHI)

Small and midsize companies are hiring.

There is ongoing demand for flexible staffing. The percentage of temporary jobs created in the U.S. in this cycle is double that of the prior one, 13.2% versus 6.5%. The pace of temporary staffing growth in the current recovery also has been faster. 792,000 temporary jobs were created in the 39 months ended December 2012. In the prior recovery, it took 56 months to add 513,000 temporary jobs.

As of the end of 2012, the temp penetration rate in the United States was 1.9%, of total U.S. non-farm employment, which is close to the high point in the last cycle. This percentage is approaching the record high of just over 2% in 2000. There is opportunity, we believe, for the temp penetration rate to expand further based on the secular demand for staffing flexibility we have been discussing.

Affordable care act: we can legally help [our clients] remain under 50 [employees] since we're the employer of record for the temporaries we provide to them

It's estimated that there are 130,000 firms with 50 or fewer employees, that over half of them do not provide coverage to their employees.

the data would show that our European operations are bottoming

W.R. Berkeley (WRB)

there would appear to be an increasing awareness of the impact that diminishing investment income is having on the industry’s economic model. While this macro situation is widely discussed, the sense of urgency in tackling these issues seems to vary from carrier to carrier. Having said this, there is an ever-growing percentage of the market that is pursuing rate in an effort to remedy the situation.

On Sandy: the industry received a wake-up call with regards to the imperfections of both cat modeling, as well as local building codes as we endure the impact that a large tropical storm can have on a region.

Workers’ compensation remains one of the lines of business where the market is most aggressive in seeking rate.

The excess casualty market is also showing early signs of a return to underwriting discipline

combined of a 98.1%. However, when one adjusts for storms as well as reserve development, we believe the company is running at about a 96.5%

With every passing quarter, it is becoming more apparent we are entering a hard market. The number of carriers seeking broad rate increases continues to grow, and the minority of companies that continue to act irresponsibly is a dwindling population. While it is true we have not yet reached the point where there is low-hanging fruit, it has been many years since we as an organization have been so encouraged by the market.

The benefits of start-ups are twofold. One, as opposed to buying something, you don’t get someone else’s problems. And two, you don’t get intangible assets on your balance sheet, you get to tax deduct the expenses of building the business, and you don’t have carry forward issues as you go forward.

Ford (F)

In the fourth quarter, total company production was about 1.5 million units, 125,000 units higher than a year ago. This is 13,000 units higher than our guidance. We expect total company first quarter production to be about 1.6 million units, up 160,000 units from a year ago reflecting higher volume in all regions except Europe. Compared with fourth quarter, first quarter production is up 72,000 units.

This was our first U.S public debt issuance in about a decade and took advantage of favorable market conditions to issue low cost, long term debt.

Europe inventory destocking: It’s principally behind us. We still have a little bit of an imbalance...But the majority, the vast majority of the destocking is behind us.

Manpower (MAN)

Revenue in Southern Europe was slightly weaker than expected...Revenue in Italy was down 8%...Spanish market continues to remain soft in the quarter...higher vacation and lower bench utilization in Germany and Sweden, which also negatively impacted the gross margins...We continue to see soft demand within the Swedish market...Japan experienced modest growth...Australia continues to languish...Our business in China and India continue to grow nicely and contribute to the bottom line

Secular trends in the area of Manpower, Experis, Right, Manpower Group Solutions, and emerging markets are all there. In many cases, the voice of these positive secular trends have been ground out by the cyclical nature of what is occurring, particularly in Europe, but it cannot be underestimated.

The conversations we’re having with our clients and prospects for the need for agility is translating to much more of an outcome based solutions environment as well as the use of temporary staff to create the agility that is required

Potlatch (PCH)

Our Wood Products division continues to perform exceptionally well bolstered by a significantly higher demand and pricing as the housing market recovers. Furthermore, the division finished the year with its best annual performance in the nearly a decade.

Like we are currently running our facilities at about 104% of capacity due to the amount of over time that we operate the facilities and that’s on a two shift basis.

ACE (ACE)

The x cat [excluding catastrophe] accident year combined ratio was 91.4%

Book value per share grew about 2%, and our operating ROE for the quarter was 8%

Our commercial P&C business in the U.S. continued to benefit in the quarter from an improving price environment where we are now achieving rate-on-rate increases for the second quarter in a row, and I firmly expect this to continue.

From what I see today, I am more bullish about the pricing environment in the U.S. than I have been for some time.

AK Steel (AKS)

Steelmaking input costs, namely coal, coke and iron ore, have fallen, and that will result in significant cost savings for us in 2013. Second, we expect to benefit from increased shipments to both the contract and spot markets in 2013 due to slightly improved overall demand and a greater share of the automotive market.

Nucor (NUE)

New CEO John Ferriola: As we announced on November 16, I became Nucor's CEO at the start of this year.

current capacity utilization of just 75% for the U.S. steel industry.

Nucor will continue to be proactive in bringing attention to the critical need for our government to enforce rules-based free trade.

Waddell and Reed (WDR)

Average productivity per advisor continue to increase reaching $44.3 thousand during the quarter, a record’s high.

We’ve seen a significant increase in the appetite for our equity products and we have not seen a concurrent diminution of the appetite for the fixed income products that had been working, which is to say, the sales are broad based and in that sense encouraging.

J&J Snack Foods (JJSF)

Churros sales were up 33%...Soft pretzels sales however were up 5%...ICEE and frozen beverages, frozen beverage and related product sales were up 4%

Number of Days Since Last 3% Down Day

noreply@blogger.com (Scott Krisiloff) — Wed, 30 Jan 2013 20:53:00 +0000

2012 was a pretty mild year as far as volatility is concerned. There were two periods of correction, but both were relatively light and there wasn't a single day that the S&P 500 was down 3% or more.

Markets have calmed down to the extent that it's actually been 448 days since the last time that the S&P 500 has fallen by 3% or more in a single day. At today's level on the Dow that would be a 400 point decline. For comparison, since 2008 we had grown accustomed to getting a decline that large once every 32 days on average.

Looking at S&P history since 1957, the current 448 day streak is better than average, but not quite at the best levels that the index has ever seen. Over that period, a 3%+ daily decline happens about once every 217 days. However there are several long periods without them. There was no such decline for 11 years between 1962-1973. Even recently there wasn't a 3% decline for nearly 1500 days between 2003-2007. That streak was broken on February 27, 2007.

Does Negative GDP Growth Portend Recession?

noreply@blogger.com (Scott Krisiloff) — Wed, 30 Jan 2013 19:34:00 +0000

While it was generally expected that 4Q was a slow quarter for economic growth, it was probably a surprise to many that the growth rate was negative. What are the odds that this negative growth portends a recession?

Assuming that the revised number remains negative this is the 42nd time in 279 quarters since 1947 that quarterly GDP growth has been negative. Of those 42 times, 27 of them came during a recession (as defined by NBER). Therefore GDP has contracted 15 times while the economy was not in recession. Below is a list of those times. The economy entered into a recession in the following quarter five out of those fifteen times.

Of course, NBER defines recession dates after the fact, so we could be in a recession right now and just not know it. Given that the market is hardly lower today, that would probably be a surprising result.

Note: Figures are NON-Annualized

QE Effect on S&P 500

noreply@blogger.com (Scott Krisiloff) — Tue, 29 Jan 2013 22:11:00 +0000

After QE3's announcement in mid September there was some concern that the effect of QE on the market had eroded because the S&P 500 proceeded to sell off by 5%. It could be true that QE is losing its efficacy, but it's worth noting that true balance sheet expansion didn't really start until mid November because of the mechanics of MBS purchases. It therefore may or may not be coincidental that MBS started to show up on the Fed's balance sheet around the same time that the S&P 500 found a bottom.

Below is a chart of how the S&P 500 has done during periods of QE, but instead of using the announcement dates, the chart highlights the times that the Fed's holdings of Treasuries and MBS were increasing (note that this analysis therefore excludes operation twist). Since the S&P 500 is now hitting new cycle highs, perhaps one could argue that QE hasn't exactly lost its potency.

Earnings Call Notes 1.29.13

noreply@blogger.com (Scott Krisiloff) — Tue, 29 Jan 2013 21:20:00 +0000

Below are quotes from calls that I've read today--snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of. Complete transcripts can be found at Seeking Alpha.

Caterpillar (CAT)

"After a great first half the economies around the world began to slow around mid-year, and as a result dealer sales to end users began to flatten out. We found ourselves with inventory that was too high and dealers also found themselves with too much inventory. As a result dealers slowed orders, and in the third quarter we began the process of scaling back production. Now while production declined somewhat in the third quarter, we took it down much more in the fourth quarter, and because of that we were able to reduce inventory in the fourth quarter. "

"We've already seen pretty substantial pickup in construction orders in the fourth quarter. "

"On mining again, we had massive orders, I mean very large orders in mining throughout much of a ’11 and really through almost the entire first half of ’12. That’s when sentiment changed I think in the world economy it was evident, in China it was softer, you had an easing of commodity demand, although, overall mining activity actually did go up in ’12. So, orders on hand were quite significant and over the past six months customers have really eased off on ordering."

Plum Creek Timber (PCL)

"Lumber and wood panel prices have increased significantly, encouraging lumber mills to increase their output. "

"Mill operators are reinvesting in their mills and some are adding shifts."

"contractor availability is expected to be a meaningful supply constraint to the industry"

"Southern sawmill owners are running extra hours to increase production to meet demand, and many are at the point where they are contemplating adding employees and an additional shift to meet the expected demand growth this year."

"assumptions that we'll see, 950,000 to 1 million housing starts next year, and we believe for that demand to be met, you're going to have to see an increase in production U.S. South, and the Southern production right now is about 14 billion board feet, and we expect that you'll see an increase in production in North America of about 3 billion board feet, and about half of it should come from the U.S. South."

Harley Davidson (HOG)

"The biggest thing, I think, surprise in 2012 was just how low the retail credit losses were. At 79 basis points, clearly, the lowest we've seen in over a decade and considerably better than what we had seen in 2011."

"we think as far as the consumer is concerned, that they're starting to shift their behavior a little bit. We may see a little bit higher credit losses. "

"we said, I think, 3 years ago, that we were going to open between 100 and 150 new dealers around the world. As you mentioned, we're certainly on plan to do that. We believe that there is still opportunity really in every market."

Yahoo (YHOO)

"talent is fundamental to our success. Attracting the best people to Yahoo! is critical, and we embarked on a number of initiatives to make Yahoo! the absolute best place to work."

"Yahoo! is focused on making the world's daily habits inspiring and entertaining. And while we're starting with unique strengths, exceeding the growth that we aspire to will take multiple years. Essentially, we need to start a chain reaction. First, we need to achieve product excellence and differentiation by launching new revamped and innovative products. With great products, comes user growth and more engaged audiences. And finally, that user adoption drives advertiser attention, spend and, therefore, revenue."

"Focusing more on the pure advertising and monetization standpoint, there's greater opportunity with the big 4: Search, Display, Mobile and Video"

CIT (CIT)

"Deposits are now almost $10 billion, representing over 30% of our total funding."

"I think the competitive dynamics are increasing, as we've kind of talked about. There's the continued focus on loan growth in our competitors as well as ourselves, but we are being very, very disciplined and so we're going to keep that discipline."

On credit spreads: "So cash flow still is probably in the 500 (bps) range, plus or minus, depending on the transactions. Our ABL is probably more in the north of the 300. And then some of the ABL market, more of the retail flow stuff is probably in the 200 range. So at least for our core markets, we feel the risk return is still attractive"

"we have 10 (Boeing 787's) on order. Our first delivery is we have 2 being delivered -- or scheduled to be delivered in 2015. So I think -- from our perspective, I think it's a little premature to kind of sort (concessions from Boeing) out. But the viewpoint is that it's modest in our overall order book and we hope that these issues kind of get resolved because it's something -- the aircraft itself is something that is big in the industry."

Danaher (DHR)

"I was in China 2 weeks ago, and we spent a fair bit of time on this subject. I think it's interesting if you just look at our own trends through the course of last year, we really saw quite the bifurcation between our industrial businesses and our healthcare businesses, both LS&D and Dental. We were basically up 20% for the full year, and we saw that strength throughout the year on the healthcare side of the portfolio. We were down nearly double digit the first half on the industrial side...I think when we look at what's happened in Life Sciences & Diagnostics, we are clearly the beneficiary of a multi-year buildout with respect to the healthcare delivery, particularly in the West but also increased utilization."

Seagate Technology (STX)

"For the December quarter, we shipped over 47 exabytes of storage with an average of approximately 823 gigabytes per drive. This reflects a 59% year-over-year exabyte growth, which is well over twice the current rate of areal density growth."

"Data consumption and creation, along with the increase of global internet connectivity continue to drive petabyte growth at rates that are significantly greater than the areal density growth rate."

Illumina (ILMN)

"the Illumina Genome Network received orders for approximately 13,000 genomes. Today, interest in sequencing services remains high, including preliminary talks of large hospitals and governments that hope to sequence significant numbers of individuals."

"we've added significant new capacity to our San Diego facility and will open a new lab later this quarter in our Hayward location. This facility, along with improvements to our existing infrastructure, will provide the capacity to sequence approximately 30,000 genomes this year."

EMC (EMC)

"We are squarely focused on several of the hottest areas in IT: cloud computing, big data and trust."

"the companies and entities out there understand that cloud and big data are going to change the landscape and if one doesn’t invest in these technologies, their companies will be left hopelessly behind."

How Long Does the Average Bull Market Rally Last?

noreply@blogger.com (Scott Krisiloff) — Tue, 29 Jan 2013 15:49:00 +0000

As of today, the bull market which began in March of 2009 is 1,422 calendar days old. Over that whole period there have been nine drawdowns of greater than 5% which segment the bull market into ten periods of bull market rally.

The average bull market rally since 2009 has lasted 99 calendar days and has seen the market rise by 18.8%. By contrast our current rally, which started in mid November, is just 75 days old and has charted a 10.9% rise. If this rally were to last in line with the averages it would go on until February 22 and the S&P 500 would rise to 1608 before the next 5% pullback. Below is a chart of the full bull market broken down by periods of rally and >5% drawdown.