In my memory, the only comparably surprising election was the 1977 Israeli election in which a militant leader Menachem Begin became Prime Minister. The perennial Labor leadership fell to a peculiar alliance of money, religion and ethnic grudge. Kipahs and Kova! (beanies and helmets) was a popular saying.
Begin turned out well. He visited Egypt and signed a peace treaty and, though he cared little about economics, managed a dramatic transition in financial policy (floating currency, lesser tariffs, VAT imposed) that underwrites much of Israel’s economic achievement. He did give the settlements a boost and there was some stuff in Lebanon. He attained nationwide respect, even from opposition politicians.
Donald Trump is no Menachem Begin. But maybe he isn’t totally Eddy Haskell. Or maybe Ivanka will be in charge. Either way, we have our ticket to the circus!
Thursday, November 10, 2016
Tuesday, July 19, 2016
Trump World?
http://www.bloomberg.com/news/articles/2016-07-19/clash-of-hedge-funds-redefines-distress-in-lightstream-debt-swap?cmpid=yhoo.headline&yptr=yahoo
Donald Trump is a President for our time. The foregoing item describes the general growth in debt litigation and, no surprise, the central role played by the private equity industry. More specifically, it identifies Apollo (APO-$16) as a hardball negotiator. Again, no surprise.
APO is operated by former Drexel Burnham Lambert leaders and their playbook is both the same and different from the circa 1990 S&L crises that coincided with DBL failure. The same is that income is generated by lending and re-lending commissions, together with transaction gains and losses. A key difference is that APO also earns management fees on much of the arranged debt and insurance income.
Where DBL issued “junk” bonds, often to newly un-regulated savings and loan institutions, APO has reached directly to retail investors through private label, high yield income funds. Is this enhanced “verticality” a good thing?
It is today, as investors seek current income. The challenge will come when interest rates rise and current investors look elsewhere for higher returns and credit quality deteriorates. Also, the consequences of APO’s complex business structure and the possibility of fiduciary challenge make it a risky bet.
Donald Trump is a President for our time. The foregoing item describes the general growth in debt litigation and, no surprise, the central role played by the private equity industry. More specifically, it identifies Apollo (APO-$16) as a hardball negotiator. Again, no surprise.
APO is operated by former Drexel Burnham Lambert leaders and their playbook is both the same and different from the circa 1990 S&L crises that coincided with DBL failure. The same is that income is generated by lending and re-lending commissions, together with transaction gains and losses. A key difference is that APO also earns management fees on much of the arranged debt and insurance income.
Where DBL issued “junk” bonds, often to newly un-regulated savings and loan institutions, APO has reached directly to retail investors through private label, high yield income funds. Is this enhanced “verticality” a good thing?
It is today, as investors seek current income. The challenge will come when interest rates rise and current investors look elsewhere for higher returns and credit quality deteriorates. Also, the consequences of APO’s complex business structure and the possibility of fiduciary challenge make it a risky bet.
Wednesday, June 15, 2016
Summer time; maybe not so easy!
Rising oil prices will have significant impact on inflation measures and will justify a modest interest rate rise. Stock prices only temporarily ignore interest rates and the prognosis is for a correction in the low double-digit range.
What to do?
For me and my type (comfortably retired), the answer is little or nothing. Our portfolios include quality corporate names and large unrealized gains. Dividend income is supplemented by distributions from tax-advantaged closed end municipal funds.
This is not a time for investment initiative as lower prices are likely. Also, risk should be controlled by emphasizing credit-worthy companies and avoiding the leverage schemes promoted by private equity sales people. In the meantime,
Know what you own and own it directly.
Avoid disruption. In an Amazon world, all retail is at risk.
Dividends matter.
If, like me, you must speculate, do it on the short side.
In the best case, the expansion cycle will continue through year 9 and beyond but the probability is there will be a pause. The consequent decline will be a buying opportunity.
BizProf100
What to do?
For me and my type (comfortably retired), the answer is little or nothing. Our portfolios include quality corporate names and large unrealized gains. Dividend income is supplemented by distributions from tax-advantaged closed end municipal funds.
This is not a time for investment initiative as lower prices are likely. Also, risk should be controlled by emphasizing credit-worthy companies and avoiding the leverage schemes promoted by private equity sales people. In the meantime,
Know what you own and own it directly.
Avoid disruption. In an Amazon world, all retail is at risk.
Dividends matter.
If, like me, you must speculate, do it on the short side.
In the best case, the expansion cycle will continue through year 9 and beyond but the probability is there will be a pause. The consequent decline will be a buying opportunity.
BizProf100
Thursday, April 28, 2016
The Next Big Thing
Phones, however smart, are now commodities like the pads, pcs and transistor radios that preceded them. The new frontier is video, specifically the creation of a new set top box (STB) that will control navigation, storage and sharing of digital television. The emerging class of devices will empower user choice and enable peer-to-peer capabilities. Further, the new technical capabilities will mesh with the 2016 FCC ruling that requires cable providers to permit 3rd-party hardware. Déjà Western Bell!
The change feeds two business areas important to Intel (INTC-$31), internet of things and data center operations. Intel IOT products are likely to be incorporated in video controllers from Cisco and some of the horde of STB manufacturers. There may also be sales opportunities in the TV market as app capabilities migrate from the phone. More significantly, Intel products will serve the data explosion consequent to the adoption of interactive video technologies and derivatives such as virtual reality and driving automation.
Success is not a given but there are few competitors that can compete at the scale of Intel design and production. Intel is a preferred provider for any of the cloud-based data service vendors. Even Amazon doesn’t have comparable chip foundry capabilities! While data center revenue is only about 28% of total, it is growing and represents a profitable future as the Company maintains a superior gross profit margin.
BizProf100
The change feeds two business areas important to Intel (INTC-$31), internet of things and data center operations. Intel IOT products are likely to be incorporated in video controllers from Cisco and some of the horde of STB manufacturers. There may also be sales opportunities in the TV market as app capabilities migrate from the phone. More significantly, Intel products will serve the data explosion consequent to the adoption of interactive video technologies and derivatives such as virtual reality and driving automation.
Success is not a given but there are few competitors that can compete at the scale of Intel design and production. Intel is a preferred provider for any of the cloud-based data service vendors. Even Amazon doesn’t have comparable chip foundry capabilities! While data center revenue is only about 28% of total, it is growing and represents a profitable future as the Company maintains a superior gross profit margin.
BizProf100
Monday, April 18, 2016
Dear Senator Sanders,
I applaud your visit to Rome; your brief meeting with Pope Francis reinforces the public commitment you and he share towards a morals-based economy. That said, I do not share this perspective, even as I agree with many of your prescriptions.
Man’s capacity is beyond his imagination, as is his sometimes depravity. I prefer visioning a free market economy that prospers from the previously unimagined, while also providing the greatest protection from the authoritarianism and folly inherent to government control. Government promotion and regulation are essential to our complex economy, but there is a continuing need for a common sense that combines compliance and efficiency.
For me, as with Joseph Schumpeter, competition and innovation are the stuff of achievement and the better path to public and private bounty. Schumpeter presciently described the power of creative destruction that is such a distinctive and appealing feature of our world. Also, I distrust any philosophy based on “father knows best”.
I agree with you that many financial trading activities are of dubious merit and are selectively beneficial. I don’t know that underwriting credit default swaps rises to a standard of fraud, but it certainly creates peculiar incentives as it generates fees and commissions for the moneyed. The imposition of transaction taxes might usefully damp credit speculation while generating even more useful tax receipts. Bravo!
Your intention of “breaking up the banks” may be unwise. I don’t think size is the primary issue. The banking industry is in a continuing consolidation --- which I think improves efficiency. Circa 2008, the banks were not the problem. My guess is that when the next crisis happens, the private equity sector will be at its core as private market liquidity evaporates in the face of unrealistic, non-market valuations.
You have made income inequality a tenet of your campaign. Whether $12 per hour is a necessary step towards $15 or whether $15 should be an immediate national standard is but a data point of a larger conversation. Wage income has stagnated as union leadership has waned. I agree with you that a vibrant economy requires a middle class that is productively engaged, not struggling to provide services to the already wealthy. Again, bravo.
As I previously told you, we disagree sharply on trade. Displaced workers have my complete sympathy and I support compensation and re-training facilities. But I loathe restricting international trade which to me represents an extraordinarily constructive alignment of efficiencies and incentives. I encourage you to support the World Trade Organization and the specific regional treaties such as the Trans Pacific Partnership.
You make good sense on issues of immigration, gun control and climate change. 3 cheers.
I have confidence you have the experience and judgment to lead our foreign policy. My expectation is that you will continue the policies of President Obama. I would encourage you to try and retain John Kerry as Secretary of State.
Indeed, this ultimately is why I will vote for you in the NY primary. I do not see Secretary Clinton offering the same degree of independent thought and personal accomplishment.
BUT, since I sent you $100, you are obliged to listen to my concerns on a crucial issue, which is Israel. Certain incendiary headlines prompted concern about your inclinations. After searching you public statements, I am satisfied that you will not jeopardize Israel or undermine the long time friendship that exists.
Like you I am a Jewish American who has spent enough time in Israel to know the difference between the Golan and the Negev. We also can see differences in American and Israeli policies, if not interests. But just as the US must pursue its interests, Israel is entitled to its own policy decisions; it is they and their children that, after all, guard the wall!
The Israeli nation lives in a physical and emotional combat zone and is entitled to be vigilant in protecting their own and their interests. The US retains the right to criticize Israeli tactics and even take such actions into account. But public criticism is something else again. I do not think your comments about “proportionality” were well advised. Survival is not proportionate.
You may recall from your presumably post-1967 kibbutz sojourn that the general expectation was that the West Bank would eventually be returned to Jordan. Events, personalities and theologies have, since then, changed the parties, changed the facts on the ground and inflamed an already violent situation. Still, the US remains publically committed to some establishment of Palestinian right and poses as useful interlocutor.
And the Palestinians? They continue to appeal to the US, to Europe for the tangible support that will not be forthcoming. They embrace victimhood. Maybe it is time to tell them the obvious; time is not on their side and that American support is purely humanitarian. Maybe they need to accept that Israeli Lives Matter.
Parenthetically, Belgium and France have been the European nations most receptive and encouraging of Palestinian aspirations. Not such a great choice.
I commend you and Secretary Clinton on the intensity and quality of your respective campaigns and assure you that I will support whichever of you succeed to the nomination.
David Lang
The writer is adjunct business professor at Borough of Manhattan Community College
Man’s capacity is beyond his imagination, as is his sometimes depravity. I prefer visioning a free market economy that prospers from the previously unimagined, while also providing the greatest protection from the authoritarianism and folly inherent to government control. Government promotion and regulation are essential to our complex economy, but there is a continuing need for a common sense that combines compliance and efficiency.
For me, as with Joseph Schumpeter, competition and innovation are the stuff of achievement and the better path to public and private bounty. Schumpeter presciently described the power of creative destruction that is such a distinctive and appealing feature of our world. Also, I distrust any philosophy based on “father knows best”.
I agree with you that many financial trading activities are of dubious merit and are selectively beneficial. I don’t know that underwriting credit default swaps rises to a standard of fraud, but it certainly creates peculiar incentives as it generates fees and commissions for the moneyed. The imposition of transaction taxes might usefully damp credit speculation while generating even more useful tax receipts. Bravo!
Your intention of “breaking up the banks” may be unwise. I don’t think size is the primary issue. The banking industry is in a continuing consolidation --- which I think improves efficiency. Circa 2008, the banks were not the problem. My guess is that when the next crisis happens, the private equity sector will be at its core as private market liquidity evaporates in the face of unrealistic, non-market valuations.
You have made income inequality a tenet of your campaign. Whether $12 per hour is a necessary step towards $15 or whether $15 should be an immediate national standard is but a data point of a larger conversation. Wage income has stagnated as union leadership has waned. I agree with you that a vibrant economy requires a middle class that is productively engaged, not struggling to provide services to the already wealthy. Again, bravo.
As I previously told you, we disagree sharply on trade. Displaced workers have my complete sympathy and I support compensation and re-training facilities. But I loathe restricting international trade which to me represents an extraordinarily constructive alignment of efficiencies and incentives. I encourage you to support the World Trade Organization and the specific regional treaties such as the Trans Pacific Partnership.
You make good sense on issues of immigration, gun control and climate change. 3 cheers.
I have confidence you have the experience and judgment to lead our foreign policy. My expectation is that you will continue the policies of President Obama. I would encourage you to try and retain John Kerry as Secretary of State.
Indeed, this ultimately is why I will vote for you in the NY primary. I do not see Secretary Clinton offering the same degree of independent thought and personal accomplishment.
BUT, since I sent you $100, you are obliged to listen to my concerns on a crucial issue, which is Israel. Certain incendiary headlines prompted concern about your inclinations. After searching you public statements, I am satisfied that you will not jeopardize Israel or undermine the long time friendship that exists.
Like you I am a Jewish American who has spent enough time in Israel to know the difference between the Golan and the Negev. We also can see differences in American and Israeli policies, if not interests. But just as the US must pursue its interests, Israel is entitled to its own policy decisions; it is they and their children that, after all, guard the wall!
The Israeli nation lives in a physical and emotional combat zone and is entitled to be vigilant in protecting their own and their interests. The US retains the right to criticize Israeli tactics and even take such actions into account. But public criticism is something else again. I do not think your comments about “proportionality” were well advised. Survival is not proportionate.
You may recall from your presumably post-1967 kibbutz sojourn that the general expectation was that the West Bank would eventually be returned to Jordan. Events, personalities and theologies have, since then, changed the parties, changed the facts on the ground and inflamed an already violent situation. Still, the US remains publically committed to some establishment of Palestinian right and poses as useful interlocutor.
And the Palestinians? They continue to appeal to the US, to Europe for the tangible support that will not be forthcoming. They embrace victimhood. Maybe it is time to tell them the obvious; time is not on their side and that American support is purely humanitarian. Maybe they need to accept that Israeli Lives Matter.
Parenthetically, Belgium and France have been the European nations most receptive and encouraging of Palestinian aspirations. Not such a great choice.
I commend you and Secretary Clinton on the intensity and quality of your respective campaigns and assure you that I will support whichever of you succeed to the nomination.
David Lang
The writer is adjunct business professor at Borough of Manhattan Community College
Thursday, April 14, 2016
Apollo Is Not A Lyre
Apollo Global Management, LLC (APO-$16) is a high risk, potentially high return situation.
Conventional wisdom is that finance companies benefit from rising rates. I don’t think this is true at APO since AUM (assets under management) will be vulnerable to negative credit events. More, I do not think the Company will be able to sustain its current shareholder payout which aggregates to $190 million per year, compared to a current income of $134 million and a cash flow of perhaps $200 million (adding back depreciation).
The APO security, which is complex in management and profit participation, has experienced dramatic reduction of distribution per share, from $3.98 in 2013 to $2.89 in 2014 to $1.38 in 2015, with a going forward rate of $1.12, now yielding a frack over 7%.
Financial companies are first distinguished by the relative proportions of their investment, fee, and transaction income. Commercial banks depend primarily on the investment income of conventional “spread banking”, further differentiated by a mix of commercial, consumer and real estate lending portfolios. More recently, banks engage in originations that generate transaction fees and sometimes trading losses.
Investment banks, on the other hand rely on transaction earnings, which are commissions and trading profits, in addition to fees on corporate services such as financings, mergers and project finance.
Apollo and the other private equity players are different again in that they earn investment and fee income. In this manner, APO earns management fees on capital raised from institutions, while also participating in the earnings generated by the capital. The Company is also able to generate transaction income, although this category is more likely to be a net expense.
The Company has built a strong fund collection effort by private labeling high return funds, largely backed by portfolios of middle market corporate loans and retail annuities. I think it is fundamentally disconnected to think such a portfolio will generate sufficient funds to sustain the current payout. And that return is reduced by multiple fees assessed through APO’s intensely convoluted structure.
APO is led by the right team; Leon Black, Joshua Harris and Mark Rowan were leaders in the Drexel Burnham junk bond operation that helped define the Eighties.. Management owns little APO stock. Black, the CEO is the oldest at 64. Does history repeat?
The stock is owned by retail investors. Institutional ownership is below average and that which exists is largely brokerage firms with whom the Company is likely to conduct related-party transactions.
The Company self-identifies as an innovative risk-taker. It maintains an active investor relations effort. Analyst coverage is wide and generally favorable. I think this is based on the expectation that a changed accounting principal (de-consolidating the invested funds) will result in a robust earning pattern. It doesn’t affect cash flow. I do wonder how the de-consolidation affects whatever fiduciary relationships the Company has towards its fund clients and shareholders.
What will happen when interest rates go up?
First, better investment returns will be available elsewhere and fund raising will stall. Second, we will learn the strengths and weaknesses of the sub-prime corporate market. Conceivably, APO will benefit from a higher level of activity to earn greater fees and make astute placements. More likely, APO portfolios will incur the costs of distress investing, including haircuts, hardball and litigation. And APO liquidity, like the high-yield market, is untested.
BizProf100
Conventional wisdom is that finance companies benefit from rising rates. I don’t think this is true at APO since AUM (assets under management) will be vulnerable to negative credit events. More, I do not think the Company will be able to sustain its current shareholder payout which aggregates to $190 million per year, compared to a current income of $134 million and a cash flow of perhaps $200 million (adding back depreciation).
The APO security, which is complex in management and profit participation, has experienced dramatic reduction of distribution per share, from $3.98 in 2013 to $2.89 in 2014 to $1.38 in 2015, with a going forward rate of $1.12, now yielding a frack over 7%.
Financial companies are first distinguished by the relative proportions of their investment, fee, and transaction income. Commercial banks depend primarily on the investment income of conventional “spread banking”, further differentiated by a mix of commercial, consumer and real estate lending portfolios. More recently, banks engage in originations that generate transaction fees and sometimes trading losses.
Investment banks, on the other hand rely on transaction earnings, which are commissions and trading profits, in addition to fees on corporate services such as financings, mergers and project finance.
Apollo and the other private equity players are different again in that they earn investment and fee income. In this manner, APO earns management fees on capital raised from institutions, while also participating in the earnings generated by the capital. The Company is also able to generate transaction income, although this category is more likely to be a net expense.
The Company has built a strong fund collection effort by private labeling high return funds, largely backed by portfolios of middle market corporate loans and retail annuities. I think it is fundamentally disconnected to think such a portfolio will generate sufficient funds to sustain the current payout. And that return is reduced by multiple fees assessed through APO’s intensely convoluted structure.
APO is led by the right team; Leon Black, Joshua Harris and Mark Rowan were leaders in the Drexel Burnham junk bond operation that helped define the Eighties.. Management owns little APO stock. Black, the CEO is the oldest at 64. Does history repeat?
The stock is owned by retail investors. Institutional ownership is below average and that which exists is largely brokerage firms with whom the Company is likely to conduct related-party transactions.
The Company self-identifies as an innovative risk-taker. It maintains an active investor relations effort. Analyst coverage is wide and generally favorable. I think this is based on the expectation that a changed accounting principal (de-consolidating the invested funds) will result in a robust earning pattern. It doesn’t affect cash flow. I do wonder how the de-consolidation affects whatever fiduciary relationships the Company has towards its fund clients and shareholders.
What will happen when interest rates go up?
First, better investment returns will be available elsewhere and fund raising will stall. Second, we will learn the strengths and weaknesses of the sub-prime corporate market. Conceivably, APO will benefit from a higher level of activity to earn greater fees and make astute placements. More likely, APO portfolios will incur the costs of distress investing, including haircuts, hardball and litigation. And APO liquidity, like the high-yield market, is untested.
BizProf100
Sunday, April 10, 2016
Dining on Squid?
Goldman Sach’s stock (GS-$150) has risen 7% off the February 2916 low and is 31% below the June 2015 high of $218. The weakness is due to lower earnings, continuing regulatory scrutiny and interest rate uncertainties. Election year sensitivities may also be weighing on the stock.
I like the stock and now adding to a modest holding.
Foremost, the Company is a market leader in an area of American supremacy. Domestically, GS will continue to lead the “League Tables” in frequency and size of transactions and benefit from the earnings collateral to that leadership. Globally, the Company will be able to choose from whatever high growth opportunities emerge.
The banking industry is undergoing profound change as regulations and technology increase the cost and skill of doing business. GS corporate advisory will have a lion share of this consolidation work but, perhaps more intriguing, is the prospect of the Company expanding its already material presence in consumer banking.
The recent earnings decline is because of lower interest earnings on customer balances. This impact is likely to reverse in the higher rate climate that generally benefits financial stocks.
The dividend is less than 20% of reported earnings. Indeed, the aggregate annual dividend of $1.7 billion trails the annual $2+ billion payout in non-cash compensation, presumably option and restricted stock. I would like to see a more equitable distribution.
BizProf100
I like the stock and now adding to a modest holding.
Foremost, the Company is a market leader in an area of American supremacy. Domestically, GS will continue to lead the “League Tables” in frequency and size of transactions and benefit from the earnings collateral to that leadership. Globally, the Company will be able to choose from whatever high growth opportunities emerge.
The banking industry is undergoing profound change as regulations and technology increase the cost and skill of doing business. GS corporate advisory will have a lion share of this consolidation work but, perhaps more intriguing, is the prospect of the Company expanding its already material presence in consumer banking.
The recent earnings decline is because of lower interest earnings on customer balances. This impact is likely to reverse in the higher rate climate that generally benefits financial stocks.
The dividend is less than 20% of reported earnings. Indeed, the aggregate annual dividend of $1.7 billion trails the annual $2+ billion payout in non-cash compensation, presumably option and restricted stock. I would like to see a more equitable distribution.
BizProf100
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