GE Commentary

Here is one of the better commentaries on GE that i have read recently.  While the actionable advise is no better / worse than others and the author comes clean on the … GE is big, messy and intentionally financially confusing, so ultimately investors are going to have to go w/ their gut … i agree

but i really liked the use of scenarios and the ability to talk thru assumptions and drivers in the model rather than just navel gazing at the same graphs and charts the company publishes and a thousand authors redress and publish

As far as my actions wrt GE … i am holding until November investor / strategy discussion

JNJ Quarterly Earnings

The Sources

Interesting Points

  • A $0.08 cent swing to earnings estimates from July based on currency valuations, especially Euro:  “If currency exchange rates for all of 2017 were to remain where they were as of last week that our reported adjusted EPS would be favorably impacted by $0.03 due to currency movements and this is an improvement from the negative impact of $0.05 in our previous guidance.”
  • The reported confidence in 2017 EOY is compelling, but assumes currency up-side:  “Therefore, we would be comfortable with our reported adjusted EPS ranging from $7.25 to $7.30 per share, an increase of $0.10 from our prior guidance and a growth rate of between 7.7% and 8.4%. So in closing, we are extremely pleased with the sales and earnings performance in the third quarter and our higher EPS guidance for 2017. In summary, we are maintaining our operational sales growth of 5.5% to 6% for the year, consistent with our goal of growing earnings faster than sales, our guidance for operational adjusted EPS growth remains strong in the range of 7% to 8% and our businesses continue to invest for the long-term while also delivering on near term priorities.”
  • Pharm area growing as anticipated:  “I think when we met in May 2017 on the occasion of the Pharmaceutical R&D review day, we anticipated that the performance of the Pharmaceutical group was going to accelerate during the second half of the year. And that’s precisely what you are seeing today.You are seeing the pharmaceutical group moving from low single-digit growth in the first half of the year to 6.7% in this third quarter. So clear acceleration of the sales of the pharmaceutical group.”

My Thoughts

  • Things are going as expected … currency values are helping bottom line
  • Does valuation, risk / reward change to drive either a) adding more shares or b) reducing?
    • 10yr FAST Graphs do not show that further investments at this time would make sense
    • With that said, however, i am not reducing shares either and will continue to DRIP shares as dividends arrive.

Interest Rates – US direction

I posted several times recently that i will buy 10yr corp bonds with >3.7% yield to call and maturity.  My weekly update had a reference to Doug Short’s post on treasuries

There is a bit more behind my bias toward flat or down rates (with some range on either side).  The key chart from Doug’s post is this one 

The key question for me is around the trend … is this a cyclical or structural downward trend in rates.  The folks who forecast materially higher rates assume that the trend is cyclical.  For me, and others, this is a structural trend and will not via business cycles change reverse.  The structural difference is driven by automation, labor force worldwide, and the soverign debt carried worldwide.  I do not have the perview nor the tools to articulate exactly what the range bands will be, but i just cannot see the overall trend reversing.  That first group of folks, sic ‘the cyclicals’, are also the cheerleaders behind an upcoming certain US tax cut to help fuel the trend reveresal.  I am just skeptical and do not see even a perfect tax reform tip the balance vs worldwide demographics and debt.  It also seems that the answer to the question will be known by EOY ’18.

Weekly Update, Oct 22, 2017

This week was filled with a bunch of noise and the real start for the earnings season.  I was also focused on learning more on technical analysis with a bit of real money on the table to really drill in the lessons.  That experience will be a complete post in itself.

  • Some interesting executive quotes from
    • Is consumption really up as much as BoA claims?  … “Consumers are spending, whether it is checks written, cash taken out of the ATM’s, P2P payments, and all the debit and credit cards, 5% more through the first nine months of 2017 than they did in the first nine months of 2016. That’s a faster growth rate than it has been in prior years.” –Bank of America CEO Brian Moynihan (Bank)
    • So i should disregard all those comments about all the ‘cash on the sidelines’ … “we saw more cash go into the markets, particularly the equity markets as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.” –Morgan Stanley CEO James Gorman (Broker)
    • this is just straight out marketing spin imho … “The pipeline…is strong also in our conversations with clients on the advisory side. There’s no sense of slowdown. We’re seeing a pickup in client dialogue, particularly I would note in technology, media, telecom, as well as industrials and natural resources. And so, it’s strong for all of the reasons that you would expect that CEOs are confident, equity market support valuations and acquisition currencies, the financing markets are open, the overall levels of financing costs are relatively low by historical standards.” –Goldman Sachs CFO Marty Chavez (Broker)
    • The impact to real estate from rising interest rates (and all of us who make money in that market) … “Rising rates to the real estate market are troublesome. They impact cap rates, they — if — as rates go up in the front end, since most of the borrowings on the projects are floating rate, you expose coverage ratios in those loans…at the margin, I would expect higher rates are going to cause greater delinquencies in real estate, and it’s one of the reasons we have at the margin, dialed back our growth.” –PNC CEO Bill Demchack (Bank)
    • I was one that thought infrastructure investments, especially water, would continue to outpace average demand – not so much? … “Although utility metering sales were relatively flat, we have seen an overall softening in the utility market over the past six months” –Badger Meter CEO Rich Meeusen (Water Meters)
  • Investment dilemnas of the week = FIT, GE and O
    • FIT(will post Monday morning)
    • GE – what a merry-go-round! … i went from wanting to buy more below $23, to watching the drama and deciding to wait until Flannery actually updates the Street on his strategy … my cost basis is<$18.  I am still waffling on the Oil / Gas business expansion in the overall GE footprint, so that may be reason for a complete liquidation if the strategy is not compelling.  a moral/ethical compromise could be made
    • O – Currently, i own O in 3 different portfolios:  core, trading and IRA.  i sold 50% of my medium position in my IRA to free up capital for possible additional investments in PEGI or BEP / BIP.  my confidence in O stock valuation expansion for near term (6-12 months) is low given the current hatred for anything brick / mortar and as well the potential rising interest rates.  I will continue to hold in ‘core’ portfolio which is the largest position, and will look to either exit in trading or continue my practice of writing 60 day out of money calls when the prices are compelling.
  • Euphoria … short post using GE’s Friday experience as the model … it’s compelling narrative and continuation of my bearish bias … but the wall of worry is one of the factors keeping multiple expansion alive
  • Jeff Miller / Doug Short weekly snapshot … one week bull rampage  (Here is Doug’s post)
  • These next two charts show how context and data type can really change the interpretation of the VERY same data … this is a comparison of 1987 and 2017 which has been a popular topic this past week … i was a broker in 1987 and remember that day (week) like it was yesterday … we as consumers of more and more visual data need to be reminded every so often that “how” the data is presented needs to be as evaluated as the data itself … else we risk error, big time.  (thanks to Jeff Miller for pointing this out)
    • non-normalized data
    • normalize data (percentage)
  • Jeff’s weekly indicators
  • A truck-load of treasury data from Doug Short
    • this is probably the key graphic for me as i try to answer:  top 10yr rate will be xx in next 2-3 years?  
    • regardless around the 3.4% 10yr i am back looking at 10yr investment corporates where i can get >3.7% with low / no capital risk … my eTrade screen this morning did not surface any bonds that hit my criteria  … here’s Baird’s commentary (i did not find helpful)
  • Or, just maybe … earnings are really supporting the multiple expansions (in a general sense)
    • My own thought here is that index investments will ride this generalization / averages … but the ride will be both directions when the tides turn

Weekly Update, October 15, 2017

For me this week, i have only nibbled at a few small trades that are intentionally shorter term than i would prefer.  I also watched in confusion as T and GE (two of my larger positions) went way south and i was torn with hold ’em, buy more or dump and run …. it ended in a stalemate of hold.

Middle Class Wages / Debt —> Looming Storms?

here is the accompanying quote from the author:  “The U.S. middle class suffers from stagnant wages, and has not seen an increase in their standard of living in nearly 20 years. This is not sustainable in a consumer-based economy. At some point, debt availability will run out and consumers will have to drastically lower their level of consumption, triggering a drop off in economic activity.”



Sage Advice

Lance Roberts posted an article on SA recently that echos most closely how i am approaching things right now ….

How i have translated the conditions into actions

  • watching for irratic / irrational moves in my watch list and snapping them up if appropriate, e.g., PEGI, BEP, IEMG and EFV
    • Note:  either nonUS or interest paying at decent rate (these are also in 401k or IRA)
  • watching for bumps in 10yr treasury yields and snapping up $5k increments of 10yr investment grade corporates, e.g., Nordstrom and Kroger
  • creating a watch list for preferred stock … investment grade cummulative preferreds, e.g., (eTrade symbols for some new issues), DLR.PR.C, AOP.PR.Q, ECF.PR.A …. DLR.PR.C is my favorite but a bit highly priced @$27.70
  • working short term trades for 1-3% gains (both short and long) … to borrow a baseball analogy, i am VERY defensive at the plate looking for a sacrifice or a single (no homerun) … just want to either get on base or advance the runner – no heros
    • Note: for shorts, i have focused on December Puts … i pay a premium, but i have more time to catch a sequence really bad days
  • trimming or liquidating stocks that just have no rational room to inflate further, e.g., CLX and possibly TJX
  • writing covered calls for stocks that i would not mind losing, e.g., TSCO

Weekly Update, Oct 1, 2017

Commentary, maybe’s and decisions

  • personal sentiment is flat to down on US equities
  • took positions in the following:  PEGI (IRA), Kroger 3.7% 8/1/2017 @ $98.96, yield to maturity of 3.805 (taxable), IEMG and EFV ((401k)
  • targeting to reduce or eliminate positions in the following:  CLX, TJX and perhaps UMPQ
  • careful toe-dipping in emerging market / asia equities
  • additional corp 10yr bonds >4.25% yield to call / maturity
  • stocks wanted at lower entry points:  CY, MSFT
  • analysis unclear – cyber security and CPU producers (is it finally time to completely give up on INTC?) – these will be part of the IOT narrative update expected later in Oct