Thursday, 21 April 2011

why you're not listening if $wdc earnings disappointed you...

the company has been guiding the market, telling you that the eps is going to be lower because of overhang, clearly margins were not great.

our notes from the call;
tam ~165mm, they shipped 49.8mm down 2.5% y/y (industry 2.3%). $2.25bn sales ~ BR asp $45.18 (-$6 y/y)
demand next quarter seasonally weak, however because of earthquake supply disruption should create a supply shortage.
2.5 inch shortages greater than shortages in 3.5 inch.
..sounds to BR that WD is going to try to win share as other suppliers are disrupted..
gross margin 18.2% (25% y/y) (19% q/q)
r&d ~10% of revenue @ $252mm
net income $142mm 0.62 eps (0.66 non gaap) run-rate-p-e ~15.

is there a signed purchase agreement with hitatchi? its in the 10q
samsung-seagate, does it change the way you talk about your deal with regulators? ... no. still going to say merger is going to better serve customers, benefits of scale will be shared with customers.
intel expect low double digit growth, what is your oem colour? 2010 industry shipped more than end demand, too much inventory in channel, two year growth rate will be about 12%, 18% in '10-'09, so low growth this year.
any indication from oem's about hit aquisition? customer reaction has been very positive.
customers asking for more supply, do you ask for higher price, fixed orders, etc? work with customers for years, have flexible model, consistent, if their costs are higher, they share them, BR yes.
thought there was 8-10mm excess TAM, there was then a shortage in cpu in quarter, but they are pretty much back where they started. will take a full year to not be supply contrained for june, sep, dec get to equilib.
does toshiba have the ability/will to invest? their press release says yes
that is very significant piece of information that we've missed! need to find that ASAP...

BR thoughts; samsung-seagate deal is definitely a negative for the merger, its not positive. Toshiba deciding to invest is VERY negative, and need to find the press release that is referred to on the conference call.

reduced the position substantially until we find that toshiba press release and have a bit more of a think...

tactics for a bubble

what is the optimal strategy for taking the most money out of a bubble situations.

number one has got to be not trying to call the top, any strategy that is long during a bubble and plans to sell out based on some sort of valuation ratio is almost always going to fail if its truly a bubble. when a bubble is in a truly frothy expansion, participants are piling in because they're afraid to miss the boat, not even a greedy fool can predict that actions of an even greedier crazy fool.

there are good academic papers that point out that a bubble is characterized by "log periodic power laws" lppl. basically, the price goes exponential, the rate of return increases with time. which in itself fits with observation and with the process that is happening, the higher short term returns attract more investors, who push the asset higher, which creates higher returns attracting more money. clearly this is a situation where momentum is increasing and calls for a trend following strategy.

as such a good strategy would be to pick a moving average of an appropriate length say 100days, and to own the asset when it crosses above that price and to stay long until it falls below, and hope to liquidate there with as little slippage as possible. the Raven has backtested this strategy with stock data from the nasdaq bubble and if he remembers correctly the best window to use was the 200day simple moving average. additionally this has the advantage of being rather robust and minimizing on trading costs. the shorter the window length, the more trades and the sooner one is stopped out of a trade, but the less risk one takes.

update of the numbers for some famous bubbles coming up....

Tuesday, 19 April 2011

WDC pnl update

Looks like there is going to be some further consolidation within the industry, again, if this passes through trust issues then its great for margin and overhang.

$WDC reports tomorrow night, and it should be a very interesting call; perhaps now is the time for a p'n'l update of the trade put on last month, and as a picture is worth a thousand words;

just to put some numbers on that trade, thats a 15% return in a month and a half, where the stock position is being hedge with a index hedge...

here is a description of why;
and here is a description of thoughts on the risk;

Friday, 15 April 2011


a really good article in the wsj last month on unions and the right to work legislation.

eurozone defaults

There were rumours on Thursday that Ireland was going to choose to default, t'anks to an article in the Irish press that suggested there really was no other option for Ireland.

  1. What is being suggested is a selective default we'd imagine, so only foreign creditors take losses. Not cool, retrospective legislation to allow this modification of creditor seniority makes us feel very queazy. Spineless Stigtits will tell you that creditors will forget about it soon enough, however to rational investor, its a huge stain.
  2. Politically this has got to be easier than writing cheques to profligate nations that cheated their way into the euro? easier to bail out the Landesbank than a Greek citizen retired years before Klaus can even dream of taking a break.
  3. It is not a given that a country defaulting would have to leave the euro, although one would imagine that it could actually be better for all parties involved if that was the result. A country like Greece can devalue back to competitiveness and set its own interest rates. Sure this will leave JCT red faced sitting on some chunky ECB losses, but he's going to have a red face no matter what happens.
  4. Ultimately all the debt above 60-90% (60 being the Maastrich debt ceiling, no really...) of GDP for the piigs is going to end up on the NAG's books.

a nice talk by Richard Koo, but....

google will show you the way to his recent talk at the "Instituted for New Economic Thinking", Soros's talkshop.

Koo makes an interesting point, that with a balance sheet recession, because collateral is so far underwater (Japan and the US now after the bursting of their property bubbles) the private sector will reduce their spending in order to deleverage. But akin to the paradox of thrift, that "saving" (paying down debt) reduces the aggregate net demand/income, which leads to more "saving". He highlights what an enormous drag this could be on the economy by pointint out that Japan could have shrunk by 10% a year because of this were it not for fiscal stimulus.

He runs aground in our mind when he says that there is a lesson for Spain in this example. If there was an excess of saving taking place in the economy surely long term interest rates would be much lower? For a country like Ireland to keep a fiscal stimulus it would be needing to generate 15% returns annually on its "investment". As has been said before, at this point the plight of the piigs has a greater parrallel with countries trapped on the gold standard.

Unless there are going to be fiscal transfers, then default really is the only option, other than a great depression without an end in sight. The single biggest problem with fiscal transfers is moral hazard and the political implications for any leader signing that cheque.

Tuesday, 12 April 2011

punch interims update

Punch interim results with some detail of splitting of Spirit.

Market likes this... not so much, down 5p to 74.5p.

Spirit has 798 managed and 554 leased pubs, will move all over to managed or sell them.
Rev; £379mm (331mm managed, 48mm leased), ebtida £67mm (45mm & 23mm) and OP of £49mm (27mm and 22mm).
Managed business performed strongly, revenue growth of 2%, op growth 12%, whereas leased had falls of 5% and 7% respectively.
More exposure to London and SE, thats attractive as London seems to be quite decoupled from the rest of the UK as we saw today being the only area with rising houseprices in the UK.

Punch (rev, ebitda, OP; £277mm, £137mm, £130mm) going to split into core and turnaround divisions, currently has 5,241, of which 3000 will likely be core, which make up 75% of the ebitda. average income of ~£80k, 95% on "substantive agreements". Turnarounds on ~£40k, 2,300 pubs. expect to sell them over 5yrs at a run rate of 500/yr.
sold 160 in the first half of the year, @ £40mm which had ebitda of £1.1mm.  (so average selling price is 250k, if they are turnarounds on 40k income that is 6.25x) (BR: what happens to the debt for these pubs though???)
concessions running at £2mm a month for reduced rent, have also made £17mm of capex over h1.

took a £370mm impairment charge on the carrying value of non core assets, £81mm goodwill write off, turnaround estate being valued now at £278k per pub, 8x their ebitda.

net debt £3,079mm from £3,277mm

more later....

some market macro quick thoughts;

bull points;
1) rates are still low, Bernanke has still got his chopper out
2) the rear view mirror still looks good for the US and Germany
3) although people are talking about 'extreme bullish sentiment' there does appear to be quite a bit of short term fear

bear points;
1) china has been tightening and its not got much press
2) consumers have been squeezed by commodity prices
3) profit margins are historically very high, and there are long term risks for both wage demands and potentially higher commodity prices

Monday, 11 April 2011

Vickers report....

There are still calls for banks to be broken up along the lines of "casino" and "utility" lines.

This just doesn't make any sense.

Firstly is lending a utility activity? well if it is then there will be an enormous amount of risk in the "utility" bank, after all there was no investment banking involved in blowing up bradford and bingley, northern rock, hbos, or even rbs. It wasn't prop trading, or underwriting, commissions from equity trading, m&a advice that sank these banks, but having too many bad loans against too little capital.

Lets pretend that we can then put loan making into the risky "casino" bank, or perhaps suggest we seperate banks along three lines, deposit taking, lending, and investment banking. The businesses that are lending institutions will still require capital to lend, they are not going to be financed out of equity. In which case they will have to borrow money from.... dum dum dum... the utility banks, in which case deposits will still be at risk, unless the government is going to just guarantee those loans, in which case you've just double the business for accountants, auditors and regulators and not changed a thing.

The fundamental problem is that depositors make a loan, but they don't believe they are taking any credit risk, so take little to no care about the credit they extend, expecting the government to bail them out. The government has to charge for this, and the people to charge are depositors. However thats a real vote loser because the general public would much rather believe they were faultless innocent victums, rather than the greedy speculators they so love to castigate.

Tuesday, 5 April 2011

hmv warning AGAIN....

Another month, another ...

HMV warning

it appears that profits will be lower than "expected" at £30mm for the full year. (after posting an interim loss of £41mm)

last year it made £74mm for FY, with interim loss of £18mm, so a profit of £92mm for h2, whereas this year it'll be more like £71mm.

There are a couple of "highlights"; that they have pushed back the test date for their debt covernants, one would imagine that is linked to their announcement on the 25th March that they are board were exploring strategic transactions for Waterstone's and HMV Canada.

The stock reaction is rather telling, its so low it doesn't care, so the Raven will add a few shares to replace the few that he sold when the stock popped on that previous announcement. It is hard to imagine that there is anything other than bad news already priced in...