Humana 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“we anticipate only modest plan withdrawals in 2014. Approximately 78,000 or 4% of our individual Medicare Advantage members will not be offered their current Humana plan in 2014.”

“we continue to anticipate growth in individual Medicare Advantage membership in 2014. That said, the funding pressures from CMS are still quite onerous, Facing these ongoing challenges makes continued investment and execution discipline, particularly for our integrated delivery model, all the more critical moving forward.”

“Revenues for dual-eligible and Medicaid awards, thus far, could potentially add revenues in the mid-single digit billion dollar range over the next few years. Though the mix of lower-margin dual-eligible business with the higher-margin Medicare business will result in a decline for the retail segment margins over time, we anticipate the segment pretax results to expand nicely.”

“Turning now to health care exchanges. Our focus for the coming year includes 14 states with our existing HumanaOne footprint. We expect the exchange products to include primarily HMO offerings, with select market presence with each of the 14 states, ensuring we are offering a competitive and cost-effective value. The preparation process is tremendous, with short timelines for implementation. Nevertheless, our operational teams have risen to the challenge. Tactical plans for sales, enrollment and retention are well into the implementation phase.”

“our desire over the long haul is to get as many members and providers participating with us in HMO plans because they offer the best opportunity for us to provide economic value to the people that we serve.”

“around the dual-eligible population. And the margins are less, but the actual dollar per case is much greater as a result of the conditions that, that population brings to needing services. And so, the way we look at it, the absolute dollars that comes to the bottom line are much greater. And so, we look at that as a good returning business. The exchanges are a little different. They’re smaller dollars, but there’s less capital that you put out as a result of the less premium there. So the — so we — but those are great examples where the margin is impacted. But both for strategic reasons and for long-term returns, it’s a good business to enter into.”

Aflac 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Additionally, we are re-weighting the current asset allocation for new money investments in Japan. You’ll recall at the analyst meeting, we discussed that our plan was to designate two-thirds of our new money to U.S. corporate bonds and one-third to JGBs.

Our investment team is revisiting our asset allocation for new money investments and expressed to allocate the majority of the third quarter cash flows to JGBs and underweight in the allocation of the U.S. corporate bond hedge.”

“So in our view from a tactical standpoint we’re in a volatile interest rate environment and I should say, Japan as well, because of their Central Bank policies we saw deals on April 5th plum it and then come back up, and they think if Japan is successful there’ll be some pressure on their rates too…We made the tactical decision to sit on the sidelines for now, re-weight that allocation more heavier towards JGBs for the third quarter and let’s see what happens with the Federal Reserve in September.”

Nominal GDP and Interest Rates

While the headline “real” GDP number showed slightly higher growth in 2Q13 at 1.7% annualized, nominal GDP showed slower growth on a year over year basis, up only 2.9% in 2Q after reaching as high as 5% growth in 2012.  The slower nominal growth could be cause for some concern if you believe that the US is relatively over-levered and can de-lever nominal debts through nominal GDP growth.  If you subscribe to this view of the world, you may see QE as an attempt to stoke inflation to aid this process, so nominal GDP growth is an important factor to consider.

As we continue to await a possible tapering of QE, below is a look at the relationship between nominal GDP and interest rates.  Both measures are effectively a function of the same two factors: growth and inflation, and going back to the 1950’s, the yield on the 10 year Treasury note has generally tracked the same path as the year over year change in nominal GDP.

Although interest rates have ticked up, the drop in nominal GDP growth may suggest that significantly higher rates are not justified for now.  However, remember markets are forward looking and economic data is backward.  Just because higher rates aren’t justified for now doesn’t mean they wont be justified in the future.

10 Year Treasury vs GDP

Diana Shipping 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“he second quarter of this year has certainly brought some exciting developments in the freight rates of large bulk carriers. This will be analyzed in (inaudible) and establish a reason why they came about. And also the prospect at which Diana could signal a long-term improvement in the earnings of large bulk carriers.”

“According to Commodore Research steel prices in China have finally started increasing, but remain about 13% lower than where they stood a year ago. These stockpiles are also finally beginning to come down. However, they still remain about 9% higher than a year ago.”

“For this year, iron ore imports are estimated to reach 779 million tons, up 8% compared to 2012. According Morgan Stanley Research, modest capacity expense and the new mining regulations in Brazil were the feedstock for metal as go from 2% to 4%, could hurt long-term growth of the long haul Brazilian iron ore supply.”

“after increasing for nine out of the last ten consecutives weeks. China’s iron ore core profile stood at 73 million tons, which is a relatively high level, which we have not seen since January this year.”

“mining companies have continued to produce high volumes of coking coal partly because they have long-term take or pay contract with infrastructure providers, which means that it has been more expensive for them to cut output than to continue producing at lower price.”

“essentially what we are looking at now in the increased importation of primarily steam coal in China, which was in the past an insignificant number. So that is one thing we’re focusing on. The other is that we are seeing now increased quantity is coming out of Australia both from new mines and new coal imports that the logistics import has been improving…So, all in all we have coal underpinning here demand for bulk carriers especially Panamax…we are positive on coal transportation both metallurgical and thin coal.”

“The charter is equivalent to the running expenses for the ship, up to now we have not seen that situation shaping up. So, up to now, the rates which are quoted in the chartering market are more bridged to the running expenses. So of course if you have both resulted very expensively you are loosing money, but if you buy lesser today you are not loosing money, therefore the forces which are bringing the balance equilibrium is not there. And I strongly believe that we are going to go through that before we see better times.”

Arch Coal 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“On the domestic thermal front, we believe that we’re in early stages of a multiyear recovery from PRB. Natural gas prices are less of a headwind. Weather has normalized to some extent, and power demand’s up. Coal has regained ground in the electric generation market. U.S. production is down, and coal stockpiles at PRB soar [ph] plans are on the decline. In fact, we believe the summer burn season will drive days of the supply and PRB customers down to below the 5-year average. This trend is a significant turnaround from where we were just a year ago and is leading to increased customer interest in securing tonnage.”

“While met coal demand remains relatively stable, driven in part by solid utilization rates at U.S. steel mills, prices are muted, and supply rationalization to date has not been sufficient to balance the market.”

“Michael, if you just look at industry data for June 30, production industry was down about 20 million tons. A big part of that is, in fact, about 12 million or 13 million tons. We think cash is going to continue to be under pressure. We think you will continue to see that transition away from the thermal market into the met market, and there’ll be further pressure on shutdowns in terms of supply. If you look at gas prices right now at $3.50, Central App thermal coal will not dispatch at $3.50 gas. And we think PRB, Western Bit, even Illinois will do fine with gas prices in that level. But as you’ve heard me say many times, we need somewhere between $4.50 and $5 gas to allow the thermal coal to dispatch either. Internal forecast for 2013 at Central App about 20 million, 21 million tons down over 2012. So down around that 128 million ton range for this year. I think, quite frankly, from what we’ve seen first half, that may be high. So there might be more pressure on that the back half.”

“there still is exit supply in the market, and I — it’s a tough number to gauge, but I think we believe that somewhere between 15 billion and 25 billion tons on a worldwide basis. But it appears to be more heavily weighted towards low-vol coals, which is why I think you’re seeing the benchmark pricing down. Clearly, Australian dollar drop has helped those producers, but I think what’s being lost in this is the relative strength of the high-vol coals into Europe. We’re down through the year, maybe $5 or $8, but it’s not nearly the percentage of what we’re seeing in — on the benchmark pricing.”

“I got to tell you everybody in this environment is pretty inwardly focused, I would say. Not that you won’t see some M&A, but everybody’s focused on managing their balance sheet, making sure they get through this tough period, and let’s just see where goes. But if you’re a Central App supplier and you’ve got some higher costs and pretty much thermal coal and you don’t have any infrastructure in place to access the international markets, I think you’re going to be pretty challenged over the next couple of years. So whether they go away, become part of another company, I think time will tell.”

“we’ve got over 400 million tons of high-quality met with a cost structure we think can be competitive here and around the world. And we want to make sure that we protect those reserves and aren’t forcing them into a market that doesn’t want them.”

“Chris, as I indicated, in the 300 million ton [met] market, we think there is a pretty significant percentage of people that have economics that don’t work at 145…we think it’s probably at least 20%”

“I can tell you there’s a lot of high-cost met out there, whether it’s in the U.S., Australia or Canada. And those are things that some people are going to face between now and, say, over the next few quarters. So we think there’s rationalization coming. We just can’t tell you how quick that’s going to take place, but what we can tell you is Arch has got itself positioned where it will be standing when all this shakes out.”

“If you look globally, there’s 280 gigawatts of new coal power generation that are being built. I mean, these aren’t being discussed, planned. They are being built and are going to come on over the next 3 or 4 years, needing 800 million to 900 million tonnage of additional supplies. So all of those things, we think, will drive improvements in the market. I mean, it’s — as John talked about our cash position, we want to make sure that we got liquidity in place to get through this tough period. We can’t tell you if it’s 6 months, 12 months or 18 months, but what we can tell you is Arch will be around once we get through it.”

Cummins Engine 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Revenues for the engine business declined by 7% compared to the second quarter last year due to lower demand in the North American heavy-duty truck market. We saw a 38% decline in shipments of high horsepower units driven by global weakness in mining and other highway markets.”

“Performance for the Power Generation business has been below our expectations in recent quarters.”

“Demand continues to recover moderately after a period of very weak industry orders in the second half of 2012, but OEMs remain cautious in raising build rates.”

“For the full year, we are adjusting our forecast for the market size to 229,000 units, down from our previous forecast of 233,000 units, with third quarter production likely to be close to second quarter levels.”

“We shipped 15,000 units to the U.S. medium-duty truck market this quarter, an increase of 18% year-over-year. We continue to expect a full year market size of approximately 109,000 units in 2013, an increase of 2%”

“Power Generation revenues in China, including joint ventures, were flat year-over-year in the second quarter, consistent with the overall weak economy.”

“For the full year, we still expect that our total revenues in China will be up 5%, with strong growth in light-duty engine and modest growth in medium- and heavy-duty trucks, offsetting weakness in off-highway markets.”

“Moving to India. Business conditions remain weak”

“As Tom mentioned, for the company, we have adjusted revenue guidance to the top of a previously announced range. We now project total Cummins’ revenues to be flat in 2013 when compared with 2012 levels. ”

“You remember, in the past, when things peaked out, we had capacity limitations on the insides of the aftertreatment system, both coatings, as well as bricks. And so we’ve done a lot of planning on that to make sure we have adequate capacity, not just for the start but for when things get stronger.”

“there is lots of interest [in natural gas engines]. As you know, the products are really just now getting in the market. The feedback on them is terrific. And so there’s a lot of excitement for it. I think just putting it in perspective, we still see over the next couple of years, that’s 2% to 3% of the total truck market. And longer term, we’re thinking 5% to 10% over a 5- to 10-year period.”

“Nobody really knows what final percent natural gas will be of the truck market. Some of it will depend on fuel prices and some of it will depend on other factors about buildout of availability and things like that. But this is where it kind of gets people kind of lose track of things. If you’re very invested in natural gas business, you’ll be thinking that because there’s a lot of interest, there’ll be hundreds of thousands of units in no time. Most of us that have been watching all of the units don’t really think that’s very likely. It doesn’t mean it’s not of great interest. There are some customers who think that this is the answer to their problems. In fact, as though, if you look at all the orders and all of the buys in total, most people are buying a few now to try them, as opposed to replacing their whole fleet. And we’ll see what happens after they try them, at what rate people change. But I think Rich has kind of given you sort of the middle-of-the-road consensus feel that maybe gets to 10% or 5% or something like that over some period of time. But we’re prepared for all of those eventual outcomes. But it’s just kind of what we see right now and we are working very actively to get that 12-liter in as many people’s hands, who want to try it, as we can, while still making sure we’re doing our normal quality launch. So we perform — with every launch of a new product, we make sure we have good infant care, we know every customer who’s got it, we’re tracking everything really closely and that’s really important in this market just like every other. So we’re doing that as we go.”

” I think longer term, we think all the fundamentals are pretty good but you look at — yet no one is expanding their fleet size. So we’re kind of in a replacement mode right now.”

“we do believe based on talking to customers in things that there is — there will be a point when people will buy more trucks than they’re retiring for some period of time in order to kind of restock to some level. We just don’t know when it’s going to be.”

“I think Latin America is a notable exception. When you go — when I go to Latin America, I was there not too long ago, things are definitely moving in the positive direction. Brazil, we had talked about that, it’s true really and Spanish-speaking Latin America too. Mexico is pretty good. I mean, this quarter, the size generally speaking, has been pretty good. But I would say in India, the trend is not good. It’s not only is it not bottoming, it’s hard to say kind of what’s — when it’s going to bottom, but I don’t think it’s bottomed yet. I don’t think it’s going to get a lot weaker, but it’s not strong. China is the most perplexing. It really is flattish. It’s not getting a lot worse, but it’s not getting a lot better either. There’s clarity, a lot of pent-up demand. When you visit there, you will definitely hear all the reasons why next week it’s going to be taking off and doing great. It just turns out that, that’s not been true for some time. So my own view is that China is the one where if it got going, a lot of other things would get going. But right now, I just don’t see that in the near term. The one with the most positive potential short term is the U.S. I think if we can get some confidence in the U.S., we would see turn at least in our businesses in the U.S. pretty quickly. We talked about the truck, but it would be true in Power Gen and other things as well. And that would be a pretty good boost to demand for a whole bunch of companies like us, and we’d be ready to respond with capacity. And again, whether that’s going to happen or not is another question. But right now, I think the flattish view is about right. It doesn’t seem like it would take a whole bunch to change the fortunes of the U.S. and China in the market to at least get a little bit better and that would make a big difference. I don’t think India is going to turn so quickly. But I think China and the U.S. could, but when? I don’t know. We’re just kind of planning for that flattish.”

“I think we’re close to bottom, but I think there’s still some pressures to take that down. I mean, all the mining houses have balance sheet problems now. They’ve turned over their leadership. They’re trying to get — they’re driving to take capital down and so I think we’re close to the bottom, but there could be another small step there down.”

“I mean, overall Brazil it’s definitely showing some signs of slowing again. The government lowered their forecast for GDP. Orders have weakened for trucks.”

Sector Leadership During the Bull Market

Four years into the bull market, below is a look back at which sectors have led the market higher at different points during the run.

Consumer discretionary has been the standout sector for the full bull.  An investor who bought $XLY at the ’09 low has nearly quadrupled her money compared to a 2.5x gain for the S&P, and she’s done that with relatively few bumps along the way.   Healthcare and staples have been leaders in recent months, but it’s easy to forget now that for the first couple years of the bull market, those two sectors were laggards.

Financials tell the story of the bull better than perhaps any other sector.  They were very strong out performers at the beginning of the bull market as the market realized that the world wasn’t coming to an end, but then gave back almost all of that out performance between 2010 and 2011 as a lingering crisis environment continued to weigh on investor psychology.  It wasn’t until late 2011 that the sector really started to lead again as investors seemingly became more comfortable with the idea that the economy had stabilized.

Note that the chart below is stylized for simplicity.  For more complete raw data of day to day sector out performance, you can check out the chart here.


Bull Market Sector Leaders

Lyondell Basell 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Our raw material mix also established a new record as 90% of our ethylene was produced from NGLs. Approximately 70% of the production was from ethane, while propane accounted for 14%. The balance was butane, which became a very competitive feedstock.”

“our Olefins plant operating rates averaged greater than 90%, and our ethylene volumes increased by approximately 9%. These rates were differential to the industry as we were able to take advantage of scheduled and unscheduled downtime at competitors’ facilities.”

“our feedstock mix benefited from processing the substantial percentage of liquefied petroleum gas, or LPG. Approximately 37% of our European ethylene production was sourced from propane and butane at production costs less than naphtha costs. Versus naphtha cracking, we estimate this benefited results by approximately $45 million. It is common for us to process LPGs during the summer months, but the volume and benefit received exceeded historic levels.”

“While second quarter results were strong, this was partially related to industry pricing conventions and significant industry maintenance. Underlying economic fundamentals within Europe remain weak. We should not assume that the relatively strong first half performance will continue into the third quarter. Within this environment, we continue to focus on costs and efficient management of our feed mix.”

” As you know, my longer-term view is that propane will trade more in line with crude oil type metrics on heating value basis, given that you can put it on a boat and transport it. And so I’ve not been as enthusiastic about PDH units as some of our competitors.”

“I’m hoping that our Congress is seeing that the market is so distorted that the ability to blend that extra ethanol into the system doesn’t exist, and it’s hurting consumers at the pump. There’s a good reason to fix it now and save everybody a bit of money and stop this market distortion. It’s also forcing refineries to move product overseas, which is — in a peak driving season with gasoline prices going up, isn’t the right thing for our country. So I’m hoping people pay attention, make some adjustments and we see less of it.”

“Remember, that as we reduce headcount and all, it takes a year or 2 for that to show up because of severance programs in Europe and how that operates versus the United States. So the payouts are a little longer.”

” If we could get a realistic target for ethanol in the blend, refiners would still blend it. There’d still be business conducted, but it’s all artificial at this point in time. And it’s driving up the price for the consumer, and there’s really no point in that…I mentioned there’s too much exporting going on. That’s being driven by misguided regulation.”

YTD Performance of Companies With Highest Short Interest

In market lore, the shorts always seem to find themselves as scapegoats for market movements.  If the market is going down, it’s because the shorts are piling on.  When the market is going up, it’s because the shorts are scrambling to cover.  So, with the S&P 500 currently up 18% year to date, it shouldn’t be a surprise that a popular story-line is that the rise has been fueled by squeezed shorts.  In order to help gauge the validity of that claim, below is the year to date performance of the 20 S&P 500 components which had the highest short interest coming into 2013.

If you had been prescient enough to buy a basket of these 20 companies at the start of the year, you’d be beating the S&P 500 by a fairly sizable amount–an equal weighted portfolio would currently be up 29.7%.  $NFLX and $GME are two stocks that would have powered that portfolio, up 168% and 82% respectively.  That does suggest that companies with higher short interest may be helping the market higher; however, it’s worth noting that short interest in these companies hasn’t dropped significantly to go along with the out performance.  The average short interest for this sample currently sits at 17% of shares outstanding vs. 20% at the start of the year.

Short Interest


Source: Compustat Data.

Company Notes Digest 7.26.13

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

US Outlook

Steven Schwarzman thinks that the market is overreacting on rising rates:

“It appears that markets persistently overreacted initially to the Fed’s indication on when and how it march for tapering its bond purchase program…it’s clearly being micro managed by the fed to not really hurt an economic recovery.” ($BX)

TD Ameritrade sees a mini rotation rather than a great rotation:

“There are signs we are in the early stages of a rotation, with investors moving out of bond funds and into equities. But I would call it a mini rotation, as opposed to the great rotation at this point.” ($AMTD)

In the real economy, there were a few signs of a weak US consumer:

UPS sees customers trading down:

“Customers around the world continue to put greater emphasis on cost, rather than time in transit, trading down in the UPS product portfolio.” ($UPS)

Restaurants saw slowdown in June/July:

“what we do know is that there was a pullback to some extent [in the US in June and July], and it does seem to be impacting the informal eating out industry a little bit more so than broader retail.” ($MCD)

Pawn shops are seeing customers unwilling to lever up:

“anecdotally, I keep hearing from our store managers around the country that our customers are self-regulating to a large degree. While we have an opportunity on the value of their collateral to loan more money…A lot of customers are taking a lot less. Again, they’re trying to regulate their budgets and make sure they come back and pick the items up.” ($CSH)

Businesses showing signs that they are ready to invest though:

Now that credit costs have come down, banks have more cash to invest in operations:

“we’ve decided to go ahead and launch a major upgrade to our core loan and deposit systems and accounting systems. We’ve been studying this for probably a couple of years now…And we have pulled the trigger to go forward on those projects…We believe that much of the incremental costs can be offset by reduced so-called environmental costs, such as credit-related noninterest expenses and regulatory assessments and FDIC premiums and the like.” ($ZION)

Meanwhile trucking companies, which are sitting on aging fleets, may be ready to unleash pent up demand:

“There’s really an excellent utilization by fleets. Fleets are making reasonable money, some are making record results…I think people are saying, “These vehicles are getting old now, not only age but also in terms of miles.” And they’re excited by the benefits they see on our new vehicles. So I think it’s — the foundation is getting strengthened, and I think it will translate into improved sales over time.” ($PCAR)

Additional investment could come from a renewed focus on more local supply chains:

“More international trade is being conducted regionally, and supply chains are becoming more efficient, so the need for the fastest express options may not grow quite as strong in the future.” ($UPS)

Good ‘ole congress still can’t get its act straight, but no need to focus on that for now:

“Congress and the administration continue to work toward a compromise on the fiscal ’14 budget and are not there yet….barring some type of grand bargain, the defense budget ultimately will need to be reconciled with the cap spelled out in the Budget Control Act of 2011, which is about $50 billion lower than the currently proposed levels.” ($RTN)

International Outlook

McDonalds says don’t jump the gun thinking things are rosy in Europe:

“First of the all European economy, I can give you a perspective. All of us travel quite a bit to our markets…the economists may be a bit ahead of themselves…You’ve got markets – I was recently in Portugal and Ireland, you got markets, some markets may have bottomed out. I would tell you some of the larger markets are still having some challenges” ($MCD)

Amazon’s positivity on Spain is certainly an outlier:

“In terms of Spain, we’re very excited about what we see. It’s growing very fast. We’re in investment mode and it’s an exciting geography for us” ($AMZN)

On the whole it seems comments on China remain more positive than negative:

“within China, fundamental copper demand is really strong. It’s growing at 8% to 10% a year.” ($FCX)

“We grew orders in a number of key sectors and geographies, including China…we see positive signs out of China, while India remains a challenge” ($ABB)

“I’m not [a believer] that China will implode and drag the world down in to a massive black hole.” ($CAT)

An optimistic view of the Chinese slowdown is that the leadership transition created uncertainty, but that uncertainty is resolving itself:

“If you go back then maybe 1.5 years ago, we’re talking about how [electric train component] orders dried up because of the uncertainty around the transportation secretary, the leadership that was going on in China, whatever. We see that gradually improving.” ($ABB)

Egypt not completely shutdown:

[in Egypt] “obviously it’s not going and hitting on all cylinders at this point in time. The customers have dialed back a little bit…the ability to move around in the desert has been somewhat hampered, especially the ability to move explosives around and obviously, explosives are key to our business in terms of completing the wells. And so, that’s just made the logistics of doing our operations there a little bit more difficult. But it hasn’t been shutdown but it clearly has been ratcheted back” ($HAL)


There are real supply and demand dynamics in the Gold market. However, the current price isn’t low enough to stoke jewelry demand yet:

“I’m not hearing a lot of anecdotal things that people have come in and say, ‘Oh, we noticed the price of gold has dropped $300 an ounce or we’re in here to buy things.'” ($CSH)

The average person was taking advantage of high prices to unload gold rather than buy more:

“I think we went through 2000 — and late ’10 and 2011, early 2012, where, if you look at our business, and I think it existed throughout the country, people were unloading a lot of excess gold. And I think that game is over, to a large degree” ($CSH)


Even if you think that rates wont rise until 2015 or 2016, its time to get ready now:

“We do have a view on when rates start to rise…the current forecast would be late ’15, early ’16 But to be in the right position at that time, you would want to shorten duration from where it is today and you want to build up your float balances such that you have lots of flexibility to manage through a rising rate environment and take advantage and build your earning power at that point.” ($AMTD)

Zions Bancorp sees rational pricing except where the big guys are playing. (Is this a sign of irrationality or advantage of low cost of capital?)

“The pricing on smaller loans, although down in the last 6 months, has been much more stable than the pricing of larger credits…We have missed out on a number of larger deals because we won’t match the pricing that some of the bigger banks are throwing out there on those deals.” ($ZION)

Five years later, markets still aren’t liquid enough for the most toxic securities from the crisis:

“I don’t think the market is liquid enough yet that we’re likely to sell material amounts [of our Trust preferred CDOs] unless we see further improvement.” ($ZION)

Small and Mid sized banks continue to pare their CRE portfolios. Headwind to prices?:

“we’ve been — I think we’ve been very clear about this, too. We’ve made a strategic decision in this company not to let the CRE portfolio grow back to anything like the proportion of the total portfolio that was in circa 2006 and ’07.” ($ZION)

Blackstone isn’t concerned about real estate prices though, they’re huge buyers:

“we started buying very large amounts of real estate really about three years ago in real scale and we’ve been the largest purchaser in the world with vastly exceeding, vastly, multiples than anyone else.” ($BX)

They argue that if rates rise it will be in a good economy, so asset values will be fine:

“So as the economy goes up and as the real estate market intrinsically gets stronger and with construction so limited of new construction, I would expect spreads as base rates go up spreads come in a little bit and can cushion the blow of higher treasury rates if that happens.” ($BX)

Insurance is another industry heavily affected by changing interest rates:

There are puts and takes to book value and investment income:

“Book value in the quarter declined 2.3% due to rise in interest rates…Given we are fundamentally buy-and-hold fixed-income investors, this is, in essence, an accelerated recognition of a loss that would have amortized in overtime anyway, as our bonds mature…The flip side, of course, is that our reinvestment rate has improved by about 60 basis points for a portfolio of similar distribution, and this will benefit our income over years to come.” ($ACE)

Low investment yields are having a positive effect on pricing:

“if you look at the economic model of an insurance company, much of the rate increases people have been seeking stem from their concerns having to do from loss activity. And the impact, which is even more leveraged of investment income declining, is likely to force people to raise rates even beyond what they had done to date” ($WRB)

But hedge-funds playing baby Buffett are keeping pressure on reinsurance prices:

“there’s more capital chasing, to some degree, less business on the reinsurance side, and it always comes back in any market economy and with any industry. It’s that old supply-demand thing, and that’s what you got going on…you see alternate capital coming in capital markets, in addition to traditional players” ($ACE)

Speaking of Buffett, interesting commentary on Berkshire in insurance markets:

“Berkshire is going to write at a profit…He’s going to write the business where he thinks he can make money. And nobody should be afraid of that competition. He’s going to give good service, give good capacity. And he’s going to want to share the market, and he’s going to do it through those basis. But he’s not going to be a price cutter. Some people have entered the business to buy their share. I think Berkshire, by and large, is going to try and do it in other ways using their capacity, their credit and their ability to put large lines down.” ($WRB)

Insurance companies have developed better insights on risk thanks to more data and technology.  Can we say the same about capital markets?

“they’re much better data over the years in the last cycle. And because of math and computer power, and technology has changed it that way, and given their insight, they’re making different kinds of decisions about how to hold retentions, how to think about exposure. And they retain much more, many do than they did in the past.” ($ACE)

Blackstone thinks it may have a new way to get retail money into hedge funds:

“we will be rolling out a product, we can’t really talk about distribution partner and all that yet, you’ll hear from us in the future but it’s a product that we’re really excited about…essentially for retail investors, it will give them access to some of the leading hedge fund managers but still preserve their ability to have daily liquidity and daily marks.” ($BX)

Pension funds are struggling to meet return objectives:

“[analyst comment] Northrop mentioned that the impact of higher rates had an adverse impact on their return on assets [in their pension plan] year to date. They were only up 50 bps through the end of June….[Raytheon response] For us, I would say more than on a year to date basis, but as of just a couple of days ago, we were just under 8% return on assets [in the pension plan]” ($RTN)

Which Blackstone thinks is a good reason for money to continue flowing to “alternatives”

“no matter how you mix those…you get a low single-digit return if you are a big institution, that just doesn’t get there, if you are a pension fund that doesn’t pay for your liabilities. So that’s why they are shifting to alternatives.” ($BX)


McDonalds is a proponent of everyday value vs. discounting:

“one thing we do see in the broader industry is we’re seeing a lot of discounting, price discounting rather than consistent value platforms which we have around the globe and we’ve put in place and we’re going to maintain that consistency because it’s important to consumers.” ($MCD)

Omnichannel retail is all the rage:

“We’re really excited about helping brick and mortar retailers provide an omnichannel experience for their consumers that obviously merges the online with the brick and mortar. We’re finding that there’s a lot of customers out there, consumers, that want to order online and ship to store.” ($UPS)

Creating an international brand in sporting goods is a local effort:

“Sporting goods doesn’t exist as cleanly as it does here in the majority in the rest of the world. So having to be a lot more thoughtful and a lot more creative. And it means we’re not taking one playbook into the new markets that we’re attacking or going into” ($UA)

Cleats are a lower margin shoe category, but integral to building an authentic brand:

“our mix today still is heavily weighted towards cleated versus non-cleated relative to a lot of other players out there. Obviously, that cleated side of our business is really, really important to our overall Footwear business from an authenticity perspective and credibility perspective, but it does come at the lowest of low margins in Footwear.” ($UA)

Juxtaposition of an old media company and a new media company:

Gannett has an established sales organization selling ad space in a shrinking medium:

“our biggest news for the quarter, our pending acquisition of Belo Corp…will both complement and accelerate our ongoing transformation…Gannett and Belo combined will be the largest owner/operator in terms of number of TV stations…as the [health insurance] exchanges come to market…there is clearly some tremendous media buys” ($GCI)

Facebook’s current challenge is to establish a sales organization in a growing medium:

“I think as you think about different industries using the power of online marketing, we see different levels of adoption but I’m a believer that over time this is where people are spending their time and any marketer who’s trying to reach people is going to spend their resources there as well…We are expanding both our direct selling efforts both to sales teams and online as well as the third parties we work with.” ($FB)


UPS highlighted that we are seeing a trough in the consumer tech innovation cycle:

“Over the last few quarters, there’s been a trough in the innovation cycle. Demand for new high tech products traditionally drives express small package and air freight out of Asia.” ($UPS)

Apple would beg to differ:

“We are on track to have a very busy fall. I would like to leave it there and go into more detail on October.” ($AAPL)

And thinks that the high end smartphone market still has room to run:

“I don’t subscribe to the common view that the higher end if you will the smartphone market is at it’s peak.” ($AAPL)

Amazon says it is focused on maximizing free cash flow. I’m not sure that Amazon knows what the definition of free cash flow is:

“what we will do is, we want to make sure that we try to maximize free cash flow, that’s something that we’ve always said. So, our strategy hasn’t changed, our outlook hasn’t changed in that regard.” ($AMZN)

There are some major physical capital expenses to building an internet business:

“The increase in capital expenditures reflects additional investments in support of continued business growth consisting of investments in technology, infrastructure including Amazon Web Services and additional capacity to support our fulfillment operations.” ($AMZN)

But costs have always come down over time:

“the cost of the equipment itself and the datacenters and over time Moore’s Law and other things and competition in the market have helped us to really be able to bring down the cost for each unit of equipment we use. And then…over time I think Facebook has impressively succeeded at making the hardware we use more efficient and the software that we run on it more efficient in terms of how much compute power that is needs.” ($FB)

Things sound pretty bleak at Zynga:

“With regards to the quarter, audience and bookings continue to decline, and we’re losing share on both web and mobile.” ($ZNGA)

At least they know what to focus on:

“In the long term, the best way to drive profitability is to grow the top line.” ($ZNGA)

Materials, Industrials, Energy

As drilling efficiency improves, rig count is no longer the most important metric to gauge activity:

“I think the people that are analyzing our industry have got to move away from rig count. They’ve got to move away from well count and really look at sort of horizontal footage drilled…pad sizes are getting much larger and that just drives more efficiency and more service intensity.” ($HAL)

Valero sees the WTI-Brent spread widening back out:

“what we have seen with WTI coming in so tight [to brent]…we expect that discount will open up again…we expect WTI discount to go back out to $7” ($VLO)

For now, there’s still activity in the mining industry, but spending is focused on maintaining production, not growing it:

“it shouldn’t be a mystery that we see some pressure from mining. But,… things that have to do with productivity or just the efficiency that you want to drive in ore body inside of a mine, we still feel pretty good about our tender backlog in that area” ($ABB)

Miscellaneous Nuggets of Wisdom

Insurance is not a business for optimists:

“anyone who’s has been in the casualty business for any reasonable length of time, it’s not a business for optimists, and you understand that the good news comes early and the bad news comes late” ($ACE)

It’s easy for financial analysts to forget the real operational challenges to executing a business plan:

“I know it takes you guys a second to update your model, but it actually take years to get permit and construction and do all these things and to spend the money.” ($VLO)

Quote of the week goes to Kevin Plank at Under Armour.  It can take decades to grow a business the right way, and that’s ok.

“The one thing about International and probably lessons learned over the last 17 or 18 years was that anything just takes time. And I think a longer view is what we need to approach any of these markets. I use the story of Japan a lot in sort of articulating how long it takes us, 8 years from 0 to $35 million, and then it was year 9 that they went from $35 million to $72 million and I think the tipping point really occurred…even with larger scale, larger size, well, resources, the things that we have today going for us, it still comes back to an investment, and it’s a prudent model…it’s not going to happen in 2 or 3 years. And if we get lucky and the market catches fire, great, but it’s going to take 6, 8 and 10 years and we’re sitting here telling you that we expect to be around for that much time and more. And we’re going to make the investments that’ll help us be great and be a local brand.”