MorningWord 12/04/12: I am not gonna pull a Tom Cruise on Oprah’s couch on you here, but it seems like the longer I do what I do for a living, the more convinced I become that a traders success and failure in the markets has more to do with psychology than sound research. This notion appears to play out more frequently than one would think, and in the last 2 decades has likely become more prevalent (since Gecko’s Fear and Greed speech in the movie Wall Street ……JK) with proliferation of the internet easing the flow of information (or mis-information in alot of cases), dramatically increased focus dedicated to financial news by huge conglomerates, and the advent of accessible investment/trading tools that have leveled to the playing field (to some degree) btwn institutional and retail investors. None of the above suggest that investors will make better decisions based on more sound research/information, just that there are more inputs to consider, most of them causing our brains to reject common sense in place of joining the herd.
Let’s take MSFT for example. For most of us, we have been convinced that MSFT’s products serve some important service in our lives. But the truth is, most of us don’t make a conscious choice to use their products. We do by default and for the most part, if asked, remain wildly unsatisfied with the user experience. MSFT is a utility company with little brand loyalty. Looking at MSFT’s 10 yr price performance, it is obvious to me that consumers’ indifference to the company and their products has been reflected in investor psychology. The stock has basically traded in a $5 range for most of the period as if it was a utility.
[caption id="attachment_20088" align="aligncenter" width="490" caption="MSFT 10 yr chart from Bloomberg"]
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While the stock has clearly returned cash to shareholders in the form of dividends in that period the stock has gone nowhere. Aside from a few fits and starts. But every rally in this time period has seen the stock return back to the long term support. Take this year’s almost 27% rally from Jan 1st to mid April…..what were investors thinking?? They got excited that there was going to be an Old Tech Renaissance with the release of MSFT’s new operating system for PC’s and mobile. What rational investor could have come to the conclusion that MSFT’s new OS and mobile products could stem the deceleration in their core businesses like Office and Server divisions, that at last check, accounted for nearly 45% of the company’s sales. My point is, if you want to buy MSFT up 27% at the high end of the 10 year range because they have $55 billion in net cash on their balance sheet, a massive share buyback, low valuation, pay a 3.4% dividend yield and generate tons of cash due to their recurring nature of their sales, be my guest. But don’t be surprised when continued product failures bring the stock back to the low end of the 10 year range, like a Pavlovian response, as investors become resigned to the fact that the company will be stuck in single digit earnings and sales growth forever.
I bring this up because it was such a head scratcher. As an investor, I look for stocks that can grow. MSFT’s products are becoming increasingly irrelevant and may never see growth again, the company has proven the chances of them innovating in a way that customers care about is basically off the table. So if you want to consider MSFT’s equity as a high quality corporate bond, have a ball, but don’t convince yourself to buy the stock for the reasons you want to buy AAPL, QCOM or AMZN.
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MorningWord 12/03/12: We often make fun of the financial media’s infatuation with Jamie Dimon. By all accounts, there are few CEO’s who have captained their ships with near flawless precision as Dimon has over the last 5 years, but isn’t that what they are paid the big bucks to do? There is no wonder that shareholders consider Dimon a “rockstar”, as JPM’s stock is only about 20% off of the 2007 high, vs BAC and C that are down 80% and 90% respectively in that same time period. It appears this out-performance is warranted when you consider JPM is expected to cap 2012 with a new all time high in earnings, compared to BAC and C who will earn a fraction of peak earnings, while analysts see neither getting back to pre-crisis levels for years, if ever.
Which brings me to the a story reported in the WSJ journal this weekend, suggesting that BAC has postponed plans to raise fees on checking accounts of retail clients for fear of a re-do of last year’s fiasco trying to do the same with debit card fees. What’s amazing about this is that fear of backlash from customers and regulators has made it nearly impossible for BAC to grow again. Fot instance, JPM this year will see its revenues rise 46% from 2008 levels, but earnings up 3.5x 2008 levels. In contrast, BAC earnings will be well below 2008’s; while revenues will be up from pre-Merrill Lynch merger levels, they will still be down 26% from 2009’s combined revenues. SO I guess my point is, if these guys can’t raise fees when they want to on core products, how will they ever grow themselves out of the earnings hole they are in?
With the increasing restrictions of Dodd-Frank expected to be enacted in 2013 and 2014, the levers BAC can pull for growth will be further diminished. Buying BAC at these levels is predicated on its existing value, because I don’t see much in the way of growth prospects. So the crux of the stock argument over the next year will be, is BAC’s balance sheet worth what BAC says it’s worth, with none of the myriad ticking time-bombs that investors have witnessed in the past few years? Quite a leap of faith…but I can see how those with 1-3 year time horizon are willing to make that bet.
While we lean a bit towards caution as it relates to investing in bank stocks, there are clear “have and have nots”. BAC’s 77% gains ytd appear extraordinary, but when you consider the stocks sits 80% below it’s pre-crisis levels, much less so. A couple weeks ago, I looked for a low premium/low delta way to get some short exposure on a move back below $9 (see Jan13 1×2 Put Spread here) in the coming weeks as my thought was that any investors who have bought the stock in the last 12 months could face far higher taxes taking gains in the new year than in December 2012, and this could possibly cause a scenario where everyone headed for the door at the same time. While BAC trades within a couple % of the 52 week highs and banging up against long term resistance, I am fully aware that this stock could be off the races for purely technical reasons in the new year, which is why I do not have an outright bearish bet on in the name. 2013 will likely see a continuation of JPM’s out-performance on an operating level, and BAC’s from a beta perspective.