Tag Archives: Federal Reserve

Tuesday’s Links: Apple & IBM , Bank Earnings Beat, Yellen Grilled

Apple & IBM Partnership

jobsibm121230-1So long are the days of intense detestation for each other. Today, Apple CEO, Tim Cook, and IBM CEO, Ginni Rommety announced that their companies were partnering for the future. The main goal of this partnership is to create “Made-For-Business” apps for Apple’s iPhone, iPad, and Mac devices with the help of IBM’s big data and analytics. At first look, this partnership is a win-win as it helps IBM move towards capitalizing on the “mobility” driver of the technology sector and it helps Apple reach towards the enterprise market, a weaker area compared to its stronghold on the consumer market. Both company’s stocks were up after market hours on the announcement. 

Along with the partnership, Apple is looking to bring an iPhone with a larger screen to the market soon and recently hired a Tag Heuer exec for its future iWatch. This leads to a testing time for Samsung, whose earnings missed big on S4 sales last week. Apple reports 2Q 2014 earnings on July 22nd and is consensus analyst earnings have them coming in with $1.22 EPS for the quarter. Time to wait and see. 

Bank Earnings Beat

Speaking of earnings, which are for the most part kicking off this week, we saw Goldman Sachs and J.P. Morgan beat expecting earnings this morning pretty handedly. JPM reported EPS of $1.46 compared to consensus analyst estimates of ~$1.29. The beat came from their fixed income trading profits declining less than expected in a market that has been characterized by low volatility. 

Goldman crushed expectations and became the first bank so far to report higher revenue in 2Q14 than 2Q13. GS’s reported $4.1 EPS vs expectations of ~$3.2. Increased revenues from boosted activity in their investment banking and investment management arms were helpful with their beat. 

It’s not often that a company’s stock goes up on the same day it announces that it has to pay $7 billion dollars to end a government investigation, but today, that was just the case. Citigroup came out a relative winner today. On the same day it reported signing a $7 billion agreement to end government investigation into its MBS activities that helped cause the crisis, it reported EPS of $1.24 vs expectations of ~$1.05. Helping this earnings beat was the fact that its trading revenues fell less than expected, which seems to be the common theme among Wall Street banks so far this earnings season.

Yellen Grilled On JPM’s “Living Will” & Moves Markets

Screen Shot 2014-07-15 at 8.14.31 PMFederal Reserve Chairwoman Janet Yellen went in front of the Senate Banking Committee to deliver the semiannual monetary policy report today. A majority of the questions that were asked came to no surprise.

A summary of the questions:

  • “When will rates rise?”
  • “When will tapering officially end?
  • Is there a chance we could continue to buy more bonds after QE ends?”
  • What’s going on with the US labor market?”

These questions received the usual answers that we’ve been hearing for the last few months. 

Two noteworthy pieces did come out of Ms. Yellen’s testimony to Congress.

  1. The report singled out valuations on small-company, biotech, and social-media shares when she said their valuations appeared to be “stretched.” This sent the major indices down from their morning highs, especially the Russell 2000, and caused a sell-off in biotech and social media ETFs. 
  2. At the end of the testimony, Ms. Yellen was grilled by Elizabeth Warren on the state of J.P. Morgan’s “living will”. The phrase “living will” comes from a provision in the Dodd-Frank Act that requires Wall Street banks to create a report on their strategy for, “rapid and orderly resolution in the event of material financial distress or failure of the company.” Warren pointed out that compared to Lehman Brothers, whose bankruptcy helped trigger the crisis, J.P. Morgan is huge. Its $2.5 trillion in assets is three times larger than Lehman’s $639 billion at the time it went under and its 3,391 subsidiaries are 15 times as many as Lehman had. Clearly, this would lead to a much longer and more difficult process of liquidating and moving the bank’s assets in a quick and orderly fashion if disaster were to strike the company. I was hoping to hear more from Janet Yellen on this, however, Warren chose to cut her off several times before we could really get a full answer. 


Thursday’s Top Links: Fixing Shiller CAPE, A Better LIBOR, The End of Quantitative Easing

Fixing The Shiller CAPE Model

Philosophical Economics wrote a great piece about the downside of relying on the Shiller CAPE ratio. While the tool has been criticized because it has been consistently stating that equities are overvalued for a large part of the last decade, very few have proposed a solution to fix the model. This piece goes into great detail to describe how changes in earnings due to small tweaks in GAAP and the treatment of goodwill have affected it. Perhaps, Pro-Forma adjustments are the solution? However, changes definitely need to be made in order for investors to continue to claim that the Shiller CAPE is still a credible model going forward.

KKR Charging Its Own Investments I-Banking Fees

A little over two weeks ago, payment processing company First Data received a $3.5B equity injection from its controlling private equity companies. I noticed this when the highly levered company’s bonds dropped in yield significantly from this action and made some big news in the credit markets. This financial engineering move has the potential to save the First Data billions of dollars going forward if they decided to call their debt and reissue at assumed lower borrowing rates with an improved credit outlook. However, I came across this article that shows KKR went ahead and just took $40mm out of that $3.5B total for underwriting fees. I’ve never heard of a P/E firm pulling this move, but it could potentially be the industry standard for private companies with multiple large owner interests going forward.

The End of QE (Is In Sight)

After its June meeting, the Fed has made plans to end its quantitative easing program in October of this year. In that month, the Fed will purchase its final $15B in bonds and mortgage backed securities (presumably until the next recession). This meeting was held before the release of the extra 288K+ non-farm jobs added in June, which goes to support the Fed’s theory that the economy will continue to slowly improve & support itself and that the stimulus isn’t needed anymore.

While this clears up one of the questions for the Fed, a more important question remains for investors: when will interest rates go up? When quantitative easing began during the crisis and rates plunged down to zero, Fed Chairman Ben Bernanke stated over and over again that rates will remain low for a considerable time and to his credit, they have. However, FOMC members have been hinting at a future rate increase coming in the next few years which has led to a lot of speculation. Wall Street is starting to pay more attention to the FOMC “Dot Plot” which shows where each FOMC member thinks the Fed benchmark rate will be at certain points over the next two years and beyond.

This chart shows congruency among the members of their thoughts on the rates through 2014 and going forward after 2016, however we see a lot of differing opinions as to where the Fed benchmark will be in 2015 and 2016. There are a lot of differing thoughts on the future of rates, from PIMCO’s Bill Gross betting big on a “New Neutral” to Goldman’s Jan Hatzius’s thoughts. Only time will tell who the winner is, but we know who the loser will be; the FOMC having to deal with Wall Street’s prying questions and pressure over the next few years.

A Better LIBOR?

Interesting piece by Quartz on how a new company called Credit Benchmark which is aiming to create more reliable and transparent benchmark data. With banks being accused of manipulating LIBOR and a handful of other reference rates, it sounds like this company could have a shot. It reminds me of IEX, the exchange created after the controversy caused by predatory high frequency trading earlier in the year. I really hope this pans out and becomes the new normal because after all of the lawsuits being brought on banks in the past few years, some ethics and credibility in major financial institutions is much needed.


-How to improve the lack of liquidity in the credit markets?: get rid of the complexities of the debt issues and make them similar to the equity markets on the exchanges.
-We just had DOW 17,000 yet short selling is low?
-Charts that show why trading volume remains low: increased regulation & ETF popularity
-Effects of taxes show that being the best trader in the world doesn’t compare to buy-and-hold results
Myths that hurt investors. Just remember, you’ll never be Buffett, nor will the stock market make your riches for you.
-Everyone will eventually own a smartphone and Android will disappoint from here on out