Category Archives: Local Charterholders

The More Things Change, the More They Stay the Same

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Lissa Rurik, CFA, CAIA

Recently some market prognosticators have alluded to similarities between today’s investment environment and that of the mid-1990’s (among others, Liz Ann Sonders at Charles Schwab). Remembering back to that time, the three predominant forces that all strategists addressed in their commentaries were technology (the internet), falling interest rates and globalization (the fall of the Berlin Wall and the rise of the Asian Tigers). Of course, these trends weren’t necessarily independent from one another, and our economy today reflects the continued impact of all three elements.

Globalization continues to progress and expand as places such as Vietnam and countries in Africa replace the former developing markets of China and countries within Latin America. Interest rates have arguably bottomed, but remain low (notwithstanding the vastly increased levels of global debt – another topic for another day). Perhaps most importantly though, technology advances driven by the internet have continued to evolve, encompassing smart phones and other mobile computing devices along with the emergence of the cloud.

As an angel investor I hear many pitches from startup ventures, and I have noted that a significant proportion of new business ideas entail a use of the mobile device /cloud platform model. Some that come to mind include:

  • a system for police evidence gathering, data management and diagnostics;
  • a process for emergency room response and patient data management;
  • online educational assessments and in-classroom diagnostics;
  • health care supply management with wearable bar code apparatus for inventory ordering; and
  • data collection and management for use in preparing environmental impact statements.

Granted, this paradigm has been in play for at least four or five years. But the level of innovation unleashed – as it permeates almost every business field and process – reminds me of the impact those early internet innovations had on that mid-1990’s economy… the productivity enhancements therein, and the consequential investment opportunities that resulted for many years to come.

A recent publication by Berkeley Professor John Zysman encapsulates the importance of the cloud concept. Essentially he finds that the internet was a catalyst for productivity because it enabled a decomposition of sorts in the production and delivery of goods, a reallocation of resource inputs to their cheapest source, and subsequent formations of global supply chain networks. Productivity growth was robust as this occurred. Today, the cloud not only extends the potential for enhanced productivity, but it almost leverages that productivity back upon itself and expands from there.

As noted by Sand Hill Group, the McKinsey Global Institute, and Deloitte Access Economics, the most obvious element of this process reflects the fact that the mobile/cloud platform can be used by anybody, whether consumer, employer, or coder on-the-go, because cloud support can be accessed independent of location and computing infrastructure.   That means we can work while riding a bus, we can collaborate with our colleagues at any place and time, and we can launch a new business with a relatively limited capital investment regardless of that business’s potential for growth.

Zysman’s piece discusses the cloud in its beginning years as a concept of architecture, in other words, a new way of organizing computing, that has now evolved to include implementation features around how those new architectural concepts are put to work.  And as production was deconstructed with the aid of internet, services on the cloud platform can now be segmented into each step, reconfigured and customized into entirely new elements of enhanced value for the user (thus leveraging productivity back upon itself).   Intense resources are now widely available and technological innovation is accelerated by the access and deployment of big data, design tools, analytics, prototyping, and sophisticated logistics and algorithms.  And as the development of applications on the cloud can be decoupled from the infrastructure, it lessens the investment requirements and speeds the time-to-value for any given business or technical innovation.

The investment community in the mid-1990’s pondered the economic importance of the internet with comparisons to the industrial revolution. The truth around that allusion may remain debatable…. However, the innovation and disruption arising as the cloud develops, and the resulting ongoing productivity gains, are at least as impactful to the economy and financial markets today as were those dot.com investment opportunities we all marveled upon two decades ago.   Maybe that’s where the 1990’s mid-bull market similarities align.

Is the innovation of the cloud platform as important as the internet was before it? (Comment below)

Are Wall Street and Main Street on the Same Block?

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Back in 1972 after Nixon’s landslide re-election Pauline Kael, the film critic at the time for the New Yorker magazine allegedly quipped “I can’t believe Nixon won. I don’t know anyone who voted for him.” While it’s a matter of debate if she actually said this, the point is still clear—sometimes we let our own circumstances and biases cloud our interpretation of data.

For instance we were listening to one market prognosticator that said that he thought that we might be seeing a new level of frugality among consumers that we have not seen in several decades, which might explain some of the recent data and resulting market action. While we believe that the consumer is more cautious than in time’s past, we also think that the data has reflected consumer caution for a while. Why the discrepancy? In our observation since us investment types make our living in part off the performance of the market, sometimes we confuse a rising market with rising fortunes for Americans in general. Therefore it can be easy therefore to neglect data that contradicts our own personal experiences even though it might not reflect what the rest of the country is experiencing.

One such brief example may be comparing the New York Wall Street bonus average per employee to that of various income level increases in the United States. While the bonus of the average Wall Streeter has remained relatively strong as of late, the real median household income has not been as robust. While admittedly the latter is inflation adjusted, one gets the general idea. Plus we haven’t seen much of inflation the last several years. Plus GDP data has been arguably mundane the past few years.

NYC Wall Street Bonus Compensation, % of Total Compensation

2013nycsecuritiescompasperc

(Click above image to view larger graphic)

Real Median Household Income in the United States

fredgraph

Gross Domestic Product

fredgraph gdp

Therefore sometimes we investors might have to be cautious in interpreting a strong market with a strong consumer or a strong economy.

Nuthin But a “B” Thang

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It was just last week that Apple came to market with a $12 billion bond deal, presumably to fund its share repurchase program. The market (as readers may recall) breathed a sigh of relief that the deal was significantly smaller than the $20+ billion that had been speculated.

And now, just a few days later, Apple is again in the news, this time on speculation that it will be paying $3.2 billion for Beats Electronics LLC, the maker of expensive, hip headphones and sponsor of a new streaming music station. We will leave it to the equity analysts to decipher whether this is a good deal for shareholders. We are trying to sort out whether it means anything for bondholders. The short is answer is: probably not. For a company with $150 billion in cash, a $3 billion deal is simply not large enough or transformative enough for it to have any impact whatsoever on credit quality. Credit spreads haven’t budged (one way or another) on the news. Even the 10 year from last week, which we noted was the weakest performer, is trading about 2 basis points tighter than new issue.

The potential transaction does underscore the danger of owning bonds of high quality issuers. There is an enormous range of potential outcomes, a whole host of nasty things that Companies can do with their cash. So which poison would we pick? Acquisitions are generally scarier – they can dramatically and suddenly alter a company’s risk profile. But share buybacks can result in death by a thousand cuts. As we move through the credit cycle, anemic growth and deteriorating margins tends to drive managers increasingly into the realm of financial engineering. Credit risk’s single tail becomes ever longer.

But for the past week, there was little sign of heightened risk. Or return, for that matter. Corporate bonds generated total returns for the weak of -0.06%, and excess returns were about the same. The new issue calendar was very average – about $22 billion of deals, and no big blockbusters this week. JP Morgan brought $2 billion of a new 10 year bond, which priced at +100, and did not really perform. Caterpillar Inc. came with $2 billion, with 10 year, 30 year, and a 50 year. The 50 year is not a typical maturity, and we think the pricing was very attractive – bonds traded 11 basis points tighter in the secondary. Next week looks like it will be more of the same – spreads continuing at tight levels, an average calendar of $20 billion….

….and the beat goes on…..

Computer Forensics Help Fall Accused Insider Trader

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Guest Contributor: Mark S. Enslin

A former Bristol-Myers finance executive pleaded guilty earlier this year to an insider trading charge, admitting to buying stock options in a biotech company that Bristol-Myers was preparing to buy. As part of the plea, the executive agreed to forfeit $311,361 in allegedly illegal profits, and he now faces a maximum of 20 years in prison and $5 million fine when he is sentenced later this year.

This relatively innocuous insider trading case is interesting for at least two reasons. First, it’s a good reminder that insider trading remains a high priority for the SEC and other regulators. In fact, over the past three years, the SEC has filed more insider trading cases than in any three-year period in the agency’s history. Many of these actions involved registered representatives, hedge fund managers, corporate insiders, and other financial professionals who conspired in various forms to trade on non-public information.

The second interesting aspect of this case is what investigators revealed was one of their key pieces of evidence: they were able to trace the fact that the executive had run a series of Internet searches on insider trading detection just prior to some of his trades, including a review of an article entitled “Ways to Avoid Insider Trading.” Technology continues to evolve at an astounding pace, and the effects of that evolution on the securities industry will continue to be significant. When the SEC is able to utilize such technology on the back end to apprehend those who violate the securities laws, it’s only a matter of time before the SEC and other regulators will expect those in supervisory positions to utilize that same technology on the front end to attempt to stop the violations before they occur. Supervision of Internet usage, so called “social media” websites, and other electronic media remains a “hot button” issue and will only continue to grow in importance.

CFAMN Compensation Survey Follow-Up: Buy-Side Analyst

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With the 2014 Financial Compensation Survey now open, over the course of the next few weeks we will look back at some of the most highly reported positions from the 2013 survey to provide a snapshot of their compensation breakdown.

We previously highlighted the data for equity portfolio managers. Today we look at buy-side analysts. Detailed analysis breaks down compensation, including base and bonus, desired compensation structure and a compensation comparison for those with and without a CFA charter. Are the results in line with what you expected? Anything striking that jumps out at you?