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
Thursday, April 28, 2016
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
Unicorns Don't Drive
The bull case for Tesla (TSLA- $ 250) begins with the Model S. It is a beautiful, distinctive and forward-thinking automobile. The Model S is the only electric powered vehicle (EV) that has achieved positive market recognition and material sales (about 52,000 units in 2015). Customer satisfaction level is believed to be high. The Company is introduced the Model X, a higher priced SUV, in 4Q15.
The Company recently began accepting orders for the E model due in 2018 and the response has been large (350K deposits @ $1,000) albeit of uncertain meaning.
Concurrently, the Company is building a battery factory in the Nevada desert.
The manufacturer’s stock is 10% down from a June 2015 high of 278, but sharply up (77%) since a February’ 2016 low of $141. This implies a current market capitalization of $30 billion, compared to $56 and $58 billion respectively at GM and Ford. For many including me, this relative valuation is distorted. A more realistic value, after considering the implausibility of profits and the need for additional financing would be at least a digit fewer (under $3 billion).
Tesla succeeds if the Company is able to achieve efficiency in highly vertical production; to use non-traditional auto marketing techniques; to double and redouble sales, to design appealing successor vehicles and to sustain a premium image in a premium demographic. Each of these tasks is challenging, with success also depending on the emergence of a significant EV category within the auto market.
My continuing bet is that these are too many hurdles.
BizProf100
The Company recently began accepting orders for the E model due in 2018 and the response has been large (350K deposits @ $1,000) albeit of uncertain meaning.
Concurrently, the Company is building a battery factory in the Nevada desert.
The manufacturer’s stock is 10% down from a June 2015 high of 278, but sharply up (77%) since a February’ 2016 low of $141. This implies a current market capitalization of $30 billion, compared to $56 and $58 billion respectively at GM and Ford. For many including me, this relative valuation is distorted. A more realistic value, after considering the implausibility of profits and the need for additional financing would be at least a digit fewer (under $3 billion).
Tesla succeeds if the Company is able to achieve efficiency in highly vertical production; to use non-traditional auto marketing techniques; to double and redouble sales, to design appealing successor vehicles and to sustain a premium image in a premium demographic. Each of these tasks is challenging, with success also depending on the emergence of a significant EV category within the auto market.
My continuing bet is that these are too many hurdles.
BizProf100
Wednesday, April 6, 2016
Ask FRED
FRED is the uncle in St. Louis who is sharper tongued and better dressed than Uncle Willie who works downtown at the NY Fed.
Every day, FRED publishes the most recent and authoritative economic data and time series pertaining to industrial production, prices, and employment, interest rates and more. It is a trove that can be searched for specific information or trolled for insights and amusement.
What is FRED saying today?
Industrial production is expanding at a 1.4% pace, declining from the 3+% of the prior three years. The simple question is whether production will revert to the higher mean levels of earlier cycles or will slip into negative, recession territory. The inflation, employment and interest rates are moderate, meaning they do not foreshadow a major shift in economic behavior.
Neither FRED nor I see a recession on the horizon.
Election year rhetoric suggests otherwise. The Republicans would, through both policy and style, upend generations of progress in international trade, upsetting a main contributor to the indulgent American lifestyle. The Democrats join the Republicans in condemning trade but add that a more equitable distribution of income would be a good thing.
Unlike FRED, I agree with the Democrats on the income thing but disagree on trade issues. That said, I’m not much concerned since I think it unlikely that even The Donald will be unable to undermine to the principles of relative advantage and comparative growth rates that drives trade and productivity.
So, all good?
Industrial production will continue to expand at least until inflation is evident, which is unlikely at least over the next 6, maybe 12 months. Still, the stock market usually leads industry activity and a decline in stock prices is possible.
There is historic parallel for the de-coupling of industrial production and rates. The accelerating market decline of 2000-02 was preceded by below trend industrial growth. The pattern recurred as the 37% S&P 500 decline of 2008 was followed by lower industrial production in 2009
The greater probability is that stocks will tread water until it becomes apparent that gains in activity and productivity, the stuff of GDP, will push GDP to historic growth levels and that the supposed new normal of lower growth is just a passing phrase.
BizProf100
Data source and suggestion:
https://research.stlouisfed.org/fred2/
http://www.tradingeconomics.com/united-states/gdp-growth-annual
Every day, FRED publishes the most recent and authoritative economic data and time series pertaining to industrial production, prices, and employment, interest rates and more. It is a trove that can be searched for specific information or trolled for insights and amusement.
What is FRED saying today?
Industrial production is expanding at a 1.4% pace, declining from the 3+% of the prior three years. The simple question is whether production will revert to the higher mean levels of earlier cycles or will slip into negative, recession territory. The inflation, employment and interest rates are moderate, meaning they do not foreshadow a major shift in economic behavior.
Neither FRED nor I see a recession on the horizon.
Election year rhetoric suggests otherwise. The Republicans would, through both policy and style, upend generations of progress in international trade, upsetting a main contributor to the indulgent American lifestyle. The Democrats join the Republicans in condemning trade but add that a more equitable distribution of income would be a good thing.
Unlike FRED, I agree with the Democrats on the income thing but disagree on trade issues. That said, I’m not much concerned since I think it unlikely that even The Donald will be unable to undermine to the principles of relative advantage and comparative growth rates that drives trade and productivity.
So, all good?
Industrial production will continue to expand at least until inflation is evident, which is unlikely at least over the next 6, maybe 12 months. Still, the stock market usually leads industry activity and a decline in stock prices is possible.
There is historic parallel for the de-coupling of industrial production and rates. The accelerating market decline of 2000-02 was preceded by below trend industrial growth. The pattern recurred as the 37% S&P 500 decline of 2008 was followed by lower industrial production in 2009
The greater probability is that stocks will tread water until it becomes apparent that gains in activity and productivity, the stuff of GDP, will push GDP to historic growth levels and that the supposed new normal of lower growth is just a passing phrase.
BizProf100
Data source and suggestion:
https://research.stlouisfed.org/fred2/
http://www.tradingeconomics.com/united-states/gdp-growth-annual
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