Saturday, 20 September 2014

The most popular posts on Financial Orbit over the last week

Here is a list of the five most popular posts on Financial Orbit over the last week...and a bonus link to my favourite post that did not appear in the top five.

1. The first part of a proposed two part series on the global ERP companies Oracle and SAP was the most viewed post.  Link here.

2. The guest post on Alibaba was the second most popular post.  Link here.

3. A 'charts today' posting covering demographics, Greece and distressed debt was the third most popular post.  Link here.

4. The regular 'Stories we should be thinking about' was the fourth most popular post.  Link here.

5. The weekday wrap on 15 September was the fifth most popular post.  Link here.

And a bonus posting that did not appear in the top five is this one titled 'Ten key thoughts from the first day of the 2014 Casey Research Summit'.  More from this conference over the next couple of days.

Ten key thoughts from the first day of the 2014 Casey Research Summit

Fascinating first day at the 2014 Casey Research Summit 'Thriving In A Crisis Economy' (link here).  Looking at all my notes and thinking through all the conversations I have had ten key takeaways (in no particular order) and relevant matters to think about from my perspective:

1. In a direct link to the title of the conference Rick Rule noted that 'crisis is opportunity' and that it is all about investor 'response' to low prices in the resource sector.  Marin Katusa observed that typically 90% of an investor's gains comes from 5 names.  Mark Yusko believed the great debate is between 'comfort or great returns' and quantified the former at a 4% CAGR for a balanced portfolio over the next few years.

2. About gold Jim Rickards believes China will more than double their holdings for 'parity' with the US whilst Rick Rule observed that 'now that gold is a four letter word in a pejorative is interesting'.  Mish Shedlock also put it on his list of 'interesting' assets.  Marin Katusa was far less bullish and believes you need to be very selective on commodity names over the next 18 months'.

3. Charles Biderman is bullish as currently 'more money is chasing fewer shares'.  Steve Moore was also bullish about the future but sourced on the strength of US companies and their continued innovation plus the benefits of upcoming US energy independence in 5-6 years.

4. The inflation vs deflation continues. Jim Rickards talked about 5% inherent price deflation offset by 5% QE-inspired price inflation and that 3% headline inflation was needed to keep real rates negative and change inflation expectations.

5. Got to like Jim Rickards quote on QE/general stimulus: 'the Fed thinks they are playing with a thermostat...they are really playing with a nuclear reactor' and with Janet Yellen 'completely model based' policy in 2015 for will 'more doveish' (QE4/'helicopter money') helped by changing FOMC composition.  Grant Williams noted that the Federal Reserve's balance sheet currently has assets around x78 its capital base...multiples more than troublesome banks in 2007-9.

6. Concerning global opportunities Mish Shedlock described the European Central Bank as a 'hedge fund' but described Japan as cheap (even if the yen was likely to go down sharply).  Marin Katusa warned that due to Russian energy supply importance a 'big cold winter would be very exciting in Europe' (and likely to lead to political compromise with Russia).  Mark Yusko noted the importance of 'avoid the cover story syndrome' and retaining 'variant perception'.  He thinks that drives the best returns in difficult areas like private equity, commodities and the emerging markets ('Japan over the next 10 years is going to beat the US by a lot').

7. Grant Williams talked about a 'war on savers' which is the 'last untapped pool of capital' whilst Mark Yusko said that 'what financial repression really means is less wealth'.

8. The US government balance sheet according to Charles Biderman as per GAAP accounting would have 'going concern' issues as the last positive net worth was back in 2000.  Mark Yusko noted that the Fed's US$4 trillion balance sheet was the equivalent of 31,710 years at US$1 a second...

9. From a cycles perspective Grant Williams observed that only QE has stopped the world, over the last 10 years, not clearly being in a Kondratieff winter cycle and that we are currently at the peak of a shorter 17-18 year war cycle.  Mark Yusko thinks we are halfway through only the tough part of the economic cycle.

10. Steve Moore noted that US corporate taxes are generally higher than international peers.

Now the more challenging job of extending these intellectual capital insights into active investment thoughts and choices...  I am sure that day two will be just as interesting and useful.

Financial Orbit wrap 20-09-14

Five sentences or graphics which sum up the Financial Orbit output over the last 24 hours across the website, twitter account and anything else thought about...

1. Take a look at the Japanese yen against the US the 109s now (or to put it another way back to the levels last seen in 2008):

A return to the 120 decade 'high' seems to me inevitable.  I remain short the yen.

2. Cash in the economy versus GDP?  Interesting chart from The Economist:

3. Interesting newsflow on both SAP and Oracle over the last day or two...I write about the latter and observe find it unattractive at prevailing. 

4. I liked this chart on the respective sizes (relative to the local banking system) of shadow banking systems.  Surprisingly China is no way near the top... (indicating again not everything you read about China is correct).  

5.  The final word has to go to Alibaba.  I liked this graphic...

...which you can keep up with 'live' here.  

I was not surprised by Alibaba having seen via an excellent guest post (here) and my own appraisal of the IPO presentation of the strategic potential (here).  I could not get any IPO stock but will be waiting to appraise the first 'live' quarterly report.  Like Facebook and Twitter volatility in the secondary market is probably an opportunity.  

Friday, 19 September 2014

Oracle and SAP - big rivalry, big newsflow (part 1)

Oracle and SAP is one of the great technology rivalries today.  Both have had interesting newsflow over the last 24 hours. So are either a great investment here or not?

Well first, have a look at the performance spread between the two (I am using the SAP ADR to iron out any FX issues).  Oracle have outperformed by around 20% over the last year or so:

So let's start with Oracle.  The last time I wrote on them (link here) was back in March when I concluded that:

'US$36 used to be a top for the shares but over recent months it has maybe turned into a support point.  That level would also be below x10 prospective EV/ebit.  That would be the first level I would look at the share even though I retain some caution about the dynamism of their operation'

The stock has moved up a little since then but will be opening the Friday US session at around US$40.  Two pieces of interesting news in the announcements yesterday.  

The first is that the numbers - and especially guidance - was not the greatest.  This is from Seeking Alpha:

'Oracle (NYSE:ORCL) guides on its FQ1 CC for FQ2 Y/Y revenue growth of 0%-4%, and EPS of $0.66-$0.70. That's below a consensus for 4.8% growth and EPS of $0.74.Software/cloud revenue is expected to grow 3%-6% Y/Y vs. 6% in FQ1, and hardware revenue is expected to be flat to down 10%. SaaS/PaaS revenue is expected to grow 39%-44%, and IaaS revenue 40%-44%'

None of this is particularly new to me - as I noted in March I 

had been having some fears about the dynamism of their earnings capability...which makes the second announcement of Larry Ellison stepping down as CEO and being replaced by two internal co-CEOs most interesting.  

In a wonderful piece of linkage again with SAP this is something the German company could tell Oracle all about.  Generally I think that co-CEOs is generally a weak / corporate compromise piece of news.  And hence this doesn't fire me up about Oracle at all.  

At US$3bn of quarterly operating profit and US$2.5bn of free operating cashflow (pre-acquisitions) some semblance of value is there (a 6%+ annualised returns to investors) but the lower earnings momentum is pushing up the prospective EV/ebit multiple - that interesting x10 prospective EV/ebit multiple is now probably below a US$36 share price.  

So I am leaving Oracle alone at the moment.  How about SAP - the underperformer of the two over the last year?  That analysis - following their largest ever purchase - is coming in part 2.   

Charts today - Scottish referendum, bitcoin, European labour costs

Charts today has to start with the Scottish referendum:

So a UK market and Sterling bounce is happening...but the question for me is how much is kick on from here.  I remain unconvinced that we significantly break 6,800 on the FTSE-100.

Similarly is the £ moving back to the c. 1.70 level against the US dollar of the early summer period?  I don't think indicated by this survey showing the level of the currency is still hurting UK exporters:

I note that bitcoin has suffered a sharp(ish) fall below US$500...

...which is interesting given that QE over a number of years has unsurprisingly made currency inherently less useful as shown by this fascinating chart from The Economist:

Finally, want to see the need for European labour market reform?  (especially in Italy and France)

Asia today - update on Japan and China plus an unfortunate newsreader in India

After a couple of busy days the return of Asia today...but little has changed.  Take a look at the Japanese yen against the US the 109s now (or to put it another way back to the levels last seen in 2008):

A return to the 120 decade 'high' seems to me inevitable.  I remain short the yen.  

And more is needed.  As this report on Reuters notes:

'The (Japanese) government on Friday cut its view on private consumption, which accounts for about 60 percent of the economy, saying that consumer spending is seen pausing although a pick-up trend remains intact'

Remember what Mr Kuroda of the Bank of Japan said at the Jackson Hole summit a month or so ago?  As I noted here he said that:

"We at the Bank of Japan do not think it necessary to change our economic forecasts for coming years...if there is anything which could derail our course toward 2% inflation target we would not hesitate to change or adjust (but for now) we will continue our current monetary policy”

This thinking needs to change...more stimulus needed.  Of course this does not mean Japanese equities are not of interest.  On the contrary as shown below the scope for a shift to a 10 year high is a distinct possibility.  Of course what that means is that stock picking is going to matter...

Otherwise the debate about Chinese growth continues. I noted in yesterday's Wrap (link here) that the signal from the Chinese property market remained negative.  Stimulus and support at the margin is clearly going to be a sub-theme over the rest of the year (along with continuing microeconomic reform).  This chart from today's Financial Times was indicative of the former.

Similar to Japan I kind of feel that the Chinese markets also remain in a stock specific orientation.  Macro concerns combined with some strong performance over recent months has evolved the cheap orientation of these markets of earlier this year.  The Hang Seng remains nicely indicative of this: note the rollover/resistance at the 25,000 level on this 5 year chart: 

Finally...this was unfortunate in India:

'AN embarrassing faux pas has proved costly for a Doordarshan newsreader. This casual newsreader mistook ‘Xi’ in Chinese President Xi Jinping’s name to be the Roman letter for 11 and read the name as Eleven Jinping. The newsreader has been removed. The mistake happened during a late night bulletin which is generally read by casual newsreaders since the regulars do not prefer to work at that time'

Thursday, 18 September 2014

Financial Orbit wrap 18-09-14

Five sentences or graphics which sum up the Financial Orbit output over the last 24 hours across the website, twitter account and anything else thought about...

Again, it has been a hugely busy last 24 hours with meetings and travel.  Here are 5 quick thoughts...

1. The new weekly AAII sentiment survey came out.  This sentiment measure is still stretched with the bullish measure in the 40%s and the bear measure below 25%.

Week ending 9/17/2014    Data represents what direction members feel the stock market will be in the next 6    months.
Bullish 42.2%
up 1.9
Neutral 34.8%
up 1.8
Bearish 23.0%
down 3.6
Note: Numbers may not add up to 100% because of rounding.

2. Want other indicators of positive sentiment?  Try the S&P500 at a high and the VIX slipping back towards that interesting sub 12 level...

3. The signalling from the pound on the Scottish referendum appears to suggest that it will be a 'no' vote.  It has been a volatile last month though as shown the pound / US dollar cross:

4. I had to smile when I read on the TLTRO that:

'The take-up of the European Central Bank's cheap bank loans 
was a disappointing €82.6bn in the first allocation'

To really get the European economy moving they need to do full QE amongst all the other policy initiatives.  

5. Interesting China property chart on Fast FT. More stimulus measures seem likely...