Dow Extends April Win Streak to 9 Straight

At some points it didn’t look like we would make it, but thanks to a strong last couple of days, the Dow rose in the month of April for the ninth straight year.  If it rises again next April, it will be the 3rd longest calendar month streak in Dow history going back to 1900.

The longest streak for any month is 15 straight years: the Dow was positive every August between 1922 and 1936.  There were also two eleven year streaks: December from 1942-1952 and July 1949-1959.

Interestingly, July has a history of generating streaks of positive seasonality.  The Dow has put together four separate streaks of positive Julys, and three of those occurred in a linked time-frame.  As a result, between 1924 and 1959 the dow was positive in 28 out of 36 Julys.

For those of us who pay attention to seasonal patterns it’s worth noting that certain seasonal anomalies can appear to persist for decades at a time without much confirmation as to whether they are real or simple superstition.  April has only been negative 4 times in the last 20 years, so if you’re under 50, it may seem like a strong April is fait accompli, but there’s never been a streak of Aprils better than this.  If you were an investor who started in the business in 1924, you may have gone your whole career thinking that a strong July is something that you could set your watch to.  For 15 of those years, August was strong too.  Investors in that era probably didn’t worry too much about selling in May.

MOnthly Win Streak.jpg

Twitter 1Q14 Earnings Call Notes

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

US Monthly actives 255m

“Monthly active users grew to 255 million in the quarter, including re-acceleration in our largest market, the U.S., which added 3 million net new users”

Constituents care about scale and engagement

“Content creators, publishers and marketers care about 2 things: scale and engagement, and our platform increasingly delivers both of those.”

Revenue per 1000 timeline views

“Ad revenue per 1,000 timeline views reached $1.44 in Q1, up 96% year-over-year and down 3% sequentially, due to typical Q1 seasonality, which is more pronounced here in the U.S. U.S. ad revenue per 1,000 timeline views reached $3.47, up 78% year-over-year.”

Lots of live events drove strength

“While Q1 was a strong quarter for us, we believe part of it was driven by the live events that I mentioned earlier. And while there will be key events in Q2 like the World Cup, there will be fewer than in Q1”

Twitter views vs. YouTube views

“s I mentioned in my prepared remarks, we had 3.3 billion views of tweets just about the Oscars in the 48 hours after the Oscars. Now that’s a big number. If you think about that in the context of something like YouTube, where you’ve got YouTube content networks with thousands of channels, some of the biggest of which that will achieve over 3 billion views a month — I think we’d all consider YouTube a mainstream platform, and we saw that around the Oscars in just 2 days.”

Advertisers are attracted to the platform around events

“ome of the key events I talked about in Q1, things like the Super Bowl, the Oscars and the Grammys, those not only attract user attention on the platform, but they also attract advertiser attention. I think some of these other events like the Ukraine or the plane crash of the Malaysian Airlines, those, again, attract meaningful amounts of conversation on the platform and usage from our users, but they’re not necessarily, I think, that would attract the advertisers to the platform to advertise specifically around those events.”

Seasonal decline driven by retail

“We generally saw a strong quarter across all of our verticals. I think if I had to point out one that showed some weakness, it would be retail, which is very much as expected as we moved out of the Q4 holiday season into Q1”

Ad load still pretty low

“as it relates to ad load, as I said in the prepared remarks, our ad load remains very low. And so we’ve had the luxury of being able to improve ad revenue per timeline view and monetization without impacting our ad load. Again, the focus for us is user experience. As we look at the $1 per user per quarter, we really think about it more from an ad revenue per timeline view perspective, and we feel like there’s meaningful runway there. ”

Don’t share number of advertisers

“as far as unique number of advertisers, that’s not a statistic we share.”

Lot of advertisers using twitter data to target marketing

“companies across all sorts of different industries increasingly leveraging Twitter data for business intelligence, customer relationship management, sentiment analysis. And then to marketers specifically, leveraging Twitter data to understand how to better target and delivered advertisements into our platform. So all of that helped us start to feel like that was something we needed to really bring in-house, because it’s strategic to the future of the way we think about our data in service to those kinds of companies.”

Stats around events

“the Super Bowl, there’s 25 million tweets around the Super Bowl in that event. But we have over 1 million tweets about sports on the platform every day. If you look at the Grammys, we have 15 million tweets around the Grammys. There’s approximately 3 million tweets about music on the platform every day.”

User experience driving ad load

“Ad load is low, very low, as I’ve stated in my remarks. We are first and foremost focused on a good user experience. We will factor in advertiser demand though. As I mentioned in the Q4 call, ad load on a [ph] very slightly driven by advertiser demand. And really the balance in the trade-off we have there is the quality of the advertising. And if we think we can serve high-quality, relevant ads, that’s something we’ll consider as we’re looking at ad load. But truly, it’s the user experience that’s the first factor in the guiding factor for us.”

Edison International 1Q14 Earnings Call Notes

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

Need to be able to spend on infrastructure

“Beyond 2017, we see the need for annual capital expenditures in electric infrastructure to support reliability at level similar to those we are proposing in our 2015 GRC. A central tenet of our strategy is that we should lead in modernizing the distribution system. Building this next generation grid require significant technical know-how and capital investment.”

Rate case based on growth prospects for So Cal Ed

“This is something Edison is particularly well positioned to do. The foundation of our investment case is the strong growth prospects for SCE. We also recognized the need to have a strategic eye on the transformative changes occurring in our industry that extend even beyond California. With this in mind, we are selectively pursuing other growth initiatives both with SCE and in competitive businesses.”

Investing where public policy provides incentives to invest

“nside the utility, the pieces that we’ve mostly focused on are really things that further public policy initiatives within the State.

So for instance, that California ISO along with some other State agencies have clearly identified a set of ‘Preferred resources’ that would be used for dealing with some of dislocations with San Onofre going out. So these are things like distributed generation, storage, energy efficiency, demand response.

So we are looking at some pilot projects that would provide referred resources particularly in the areas most affected by San Onofre going out. And that would be additional growth opportunity within the utility. The State has a mandate on energy storage 1,300 megawatts across the State. Our share of that is a little less than 600 megawatts within SCE and half of that can be actually owned and put in rate based by the utility.

So we are looking at those opportunities that would really ducktail with our modernizing the distribution system efforts. Community solars and other areas where that actually might be a combination of growth opportunities both within the utility and outside of the utility. So those are some of the high level areas.”

Focused on growth opportunities

“I think very long-term, if in fact we have good growth opportunities that’s really what will provide sustained earnings growth and sustained earnings growth ultimately circles back to providing sustained dividend growth. So it’s the usual balancing acted every company has to go through.”

A lot of energy in the state but not necessarily in the right places

” we’ve got a lot of energy in this state of times, but may not be in the right place and we need to have voltage in the right places too and to in order need combination a lot of things.’

Residential rooftop solar requires subsidies to work

“our sense is been the residential rooftop solar business models really largely requires subsidies and kind of cost shifting mechanisms to really be viable that is not been as appealing to us. As a result, we’ve really focused more on the commercials and industrial distributed generation activities.”

Not interested in putting residential solar into rate base

“for the foreseeable future. We would not really look to try to put residential rooftop solar into owned that, put it into our rate base.”

Provide the infrastructure to facilitate a distributed network

“our primary strategy is provide the network, provide the backbone through a modern distribution system that really facilitates any and all of these distributed resources. Whether that’s rooftop solar or whether its storage and anything else. That’s the part that we are uniquely positioned to do well and that’s really where our investment dollars are focused in the utility.”

Cummins 1Q14 Earnings Call Notes

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

North America Heavy duty truck market better than initial guidance

“we are raising our full year outlook for most on-highway markets. Shipments to the North American heavy-duty truck market exceeded 22,000 units in the first quarter, an increase of 18% from 2013 levels. First quarter market share was 40%. We now expect the full year market size to increase by 12%, up from our previous forecast of an 8% increase. We still expect our full year market share to be at 38%, unchanged from our previous guidance.”

Chinese enforcing a move to newer emissions standards

“Last week, the Ministry for Industry and Information Technology, MIIT, published a directive that sales of NS3-compliant vehicles must cease by the end of this year. This is a positive development and clear plans for strict enforcement of regulations have not been shared. With the deadline for sales of NS3-compliant vehicles now set it would be logical to assume the demand for NS3 vehicles will remain strong for the remainder of this year. But with OEMs already having shifted a significant proportion of production to NS4 vehicles, it’s not yet clear how overall industry demand and OEM production will play out in the second half of the year.”

Raising China guidance

“full year revenues in China including joint ventures are now expected to grow 15% for the year, up from our previous guidance of growth of 11%.’

Indian economy remains very weak

“revenues in India, including joint ventures were $385 million, down 25% year-over-year due to weaker demand across most end markets as the economy remains very weak.’

Too early to call the bottom in India

“I would just say that it’s way too early to call the turnaround in India. We obviously have a bullish medium to long-term outlook on India. We think there’s a lot of positive trends in the country about developing middle-class and all the other things we have talked about before at our Investor Day. But short term the economy is in pretty bad shape. They have got budget deficits. They have got a divided government. The elections aren’t even complete. I don’t think they finish for another couple of weeks, counting of the votes. There is still quite a bit of turmoil.

So there’s no direct action from the government to resolve some of the critical issues. Road building’s slowed to a halt. A lot of the things that were going well have really slowed down over last year, not to mention, just the basic macroeconomic effect. So our view is it’s too early to call, and as you mentioned, our results are pointing out that things have definitely not turned around. If anything, we should see some stabilizing and given the comparisons in the second half, we will see some improvement I think, but that’s just because the second half comparisons are so much weaker.”

Expecting a big shutdown in production in Brazil in 2Q

“We are seeing OEMs planning significant shutdowns into the second quarter. I think without commenting specifically on our numbers in April we are expecting a big cut in industry wide production in the second quarter. Then the outlook for the third quarter somewhat uncertain we will keep going on other than how much commercial activity there is going to be. Typically Q3 is seasonally the highest quarter in the year, but it’s hard to see that right now. So I think clear move down, not clear what the catalyst for improvement in the short term”

There aren’t many good markets now

“Andy, you know, I’m the CWO, the chief worrying officer. So, I do quite a bit of worrying about markets, and as I mentioned a little bit earlier, there aren’t that many good markets now. There’s markets that aren’t a disaster and there’s markets that are doing better. I mean, the North American truck market is the one market I can say it’s actually getting pretty good. Still not a boomer yet; if we were discussing but it’s maybe on its way to one; but really, most of the other markets, are not very good. So, again, we’ll see what happens from here, but I do believe that if we get some turnaround and just the basic economic growth rates across the world and I think Europe is doing a little better than we thought and U.S. is definitely picking up. If we get some of these other emerging markets to get going, we’ll see very, very good growth and then I could comment much better about where we see the end of 2015.”

Still lacking visibility

“I think it’s pretty uncertain about what 2014’s going to finish out like and how that sends us into 2015. So, I guess, while I’d love to give you more or less confidence, I’d just right now, I don’t feel like I have any more visibility than I did three months ago or six months ago.”

Infrastructure development in China has definitely slowed

“a couple of things to think about China. One is that the infrastructure growth rates in China have definitely slowed down. And that’s why you see construction markets, Power Gen markets start slowing. That has happened and it is definitely happening. You can see it almost everywhere, just number of claims deployed, definitely slowed down. And we really haven’t seen significant improvement there. They’ve still got a very robust economy. Right GDP growth rates are still going, very large urban populations that are making products and buying products and things like that. And so that’s driving trucking. Trucking is still going and they have a lot of big road infrastructure. They have gigantic logistics costs in the country that they’re trying to reduce. So trucking well it is not unrelated.

Trucking growth rate can continue even if infrastructure growth rates, things like build out of cities, new factories, et cetera, airport slowdown and that’s exactly what we’re seeing now.”

The Chinese economy is still significantly weaker than a couple of years ago

“I would just tell you that from our perspective, the Chinese economy is still significantly weaker than it was just a couple of years ago, and that’s really at these infrastructure things.”

Jacobs Engineering 1Q14 Earnings Call Notes

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

Market is still price sensitive, cost remains an issue

“The market remains price-sensitive. We still are not seeing that point in the marketplace where price is not an issue and where we’re starting to see margin expansion other than in a most minor way. So it’s really important that we drive down our costs.”

Lots of opportunity in infrastructure

“Moving on now to infrastructure. We’ve described that market as strong, it certainly is. You can see that our comment on our road, rail. Airport opportunities are abundant, and particularly the U.S. and U.K. markets, they’re very strong right now.”

Leader in technology integrated buildings

“The fact that we are in a tech building differentiator for us is a positive across almost all the markets, and we think about things like the data centers, mission-critical facilities, that’s a tremendous strength for Jacobs, probably the leader in the industry there.”

M&A in pharma space leads to opportunities for Jacobs

“Some of the mergers and acquisitions activity in the pharma industry looks like it’s going to be a very strong plus for us. So we see there some significant opportunities that are going to be created by some of these recent merger acquisitions that should leverage up into a number of projects for Jacobs in the pharma space.”

Seeing good opportunities in LNG

“everybody knows about gas monetization, there’s a lot of activity there. The good news there is that there’s some increasing opportunity for us.”

Lot of chemicals plants being built

“chemicals, it’s very strong. If you think back, at one time, this was 12% or 13% of revenues, today, it’s 22%. The U.S. expansion in chemicals is enormous and a lot of that’s driven obviously by the low-cost gas that’s coming off the mission on conventional gas exploration development. But the good news about that is in addition to ethylene, which is the big driver, there’s a significant amount of derivatives business and that’s an area that plays very strongly to Jacobs’ capability. And we continue to believe we’re going to be able to be successfully in executing a number of sizable derivatives projects based on this ethylene expansion.”

Analyst comment: Exceptional at integrating acquisitions

“Jacobs is clearly exceptional at integrating”

Pricing better than 08 but still not great

“We are seeing the clients try to push more risk on to their suppliers. So that’s a battle we’re fighting constantly. So far, it’s a battle we’re winning but it is a battle we have to fight every time we look at one of these projects. And that’s partly an indication that the market is just not yet truly as strong as any of us would like it to be. So if margins are running faintly better quarter-by-quarter, but what I mean very faintly, we’re talking about 0.1 basis point or less kind of growth in the quarter. Thought it’s — excuse me, it’s not a robust market yet by any means. It’s not dirt cheap like it was after the bust in 2008, but it’s pretty skinny.”

Some typical project sizes in telecom

“these projects, the programs individually run from $50 million to $200 million in terms of capital cost. So just to use a hypothetical number, let’s say, that 20 projects have been awarded and we won 12, which is about the right ratio. They’ll range in size from, I say, $50 million to $200 million, maybe in a few cases, $300 million. So probably you’re looking on an average there of — well, let’s use an average of $100 million just to keep it simple. So that’s a $1 billion worth of work.”

$1 B+ projects 57% win rate too high of an assumption, but pretty significant

“The large project gestation continues to be a positive. I looked at a list yesterday in our sales review that must have had 25 projects on it. And these were all the sort of the big ones. And our win ratios continue to be good in that regard. So I’m certainly very positive about where we are. I don’t know that we’ll win 57% of the big projects. I think that would be unrealistic for us. But I do think our win ratios will be pretty significant and more than adequate to fuel the growth that we’re talking about.’

Mining activity improving primarily for copper

“South America and Asia, not Australia. And although there’s one fairly big program in Australia, I think we’re going to see. And then it’s almost all copper.”

Mining projects start to hit in 2015

” think the big impact is all 2015 and beyond because it will — there’s speed and study work that will be pretty substantial first.”

Lot of infrastructure development needed

“I saw a study from I think it McKenzie just the other day, and their argument is there’s a $57 trillion investment in infrastructure globally that has to be made between now and 2035, I think that was the date. I mean $57 trillion, that’s a really big number. So I remain very positive about our infrastructure business, and I’m seeing us start to get growing share of that market.”

Earnings Compared to Expectations

If you’re a casual observer of markets, you might think that the most important thing that a company can do is beat analyst expectations of earnings.  Markets help to reinforce that view because individual stocks often jump by significant amounts after earnings reports and the financial media usually focuses its earnings summaries on whether or not a company “beat” or “missed” and by how much.

About half of the S&P 500’s constituents have reported earnings so far this quarter and, according to Factset, a whopping 73%, have beaten estimates.  That sounds like a great number, but in reality it doesn’t give a clear picture of whether company earnings over the whole period have been successful or disappointing.

Analysts revise earnings estimates right up until a company’s earnings report, so really all it means when a company beats earnings is that it did better than analysts expected it to based on information that analysts had up to that day.  To get a better sense of how companies really did relative to expectations, it might be more proper to compare actual earnings to the expectations that existed before the quarter started.

The earnings game is like betting on a horse race a few lengths from the finish line.  You’ll have a better chance of guessing which horse is going to win, but that doesn’t tell you anything about how the horses did relative to how they “should” have done.  To really understand if a horse met expectations you have to look at the lines set by handicappers before the race began.

When you look at this quarter’s earnings relative to what analysts expected before the quarter started, the beat rate isn’t quite as astronomical.  Only 45% of companies have beaten the estimates that were set on December 31, before we got to see any of the race unfold.

Real Earnings Beat Rate


Source: Factset, Compustat Data, Avondale

Note: there were some challenges in putting this data together, but I think I caught most of the errors that could have skewed the data set.  I’m fairly confident that the conclusion is valid, but because I can’t be certain, a special caveat is needed.  That 45% number should be taken with some assumed margin of error.

National Oilwell Varco 1Q14 Earnings Call Notes

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

Most of the easy oil has already been discovered

“with most of the easy oil already discovered, future conventional sources will continue to become increasingly challenging to find. As economic growth steadily drives oil demand, we believe that growing production from; one, deepwater technology, which opened up vast horizontal expanses of the planet to production, and two, shale technology, which opened up vast vertical sections of the stratigraphic column to production will supply this demand, both oil and NGLs in greater and greater proportion through the 21st century’

Highest marginal cost barrel is the worst positioned

“Since the earliest days of the oil industry, companies have battled ferociously to emerge as the lowest marginal cost source, or at least not be the highest marginal cost source of the last incremental barrel. The high-cost barrel is the most disadvantage position on this battlefield. When economic cycles diminish demand, as they do from time to time, oil prices drop and the highest marginal cost position suffers the most.”

The battle lines of the oil industry constantly ebb and flow

“market forces continually test to resolve high marginal cost producers. The battle lines constantly ebb and flow as various combinations of innovation and geology lead winners to relative advantage and sometimes brief periods of respite from harsh market forces, at least until their fields decline or some other competitor finds better rocks and technology.”

The success of an oil service provider is based on demonstrated ability to lower cost of production

“NOV is a unique supplier of critical components to the combatants on this battlefield. We understand that our success rests on the success of our customers, meaning lowering their marginal cost per barrel”

“Our products win demand in the marketplace by conferring lower cost and higher value to their users. That’s why we must continue to invest in promising technologies and ideas.”

The cost of producing deepwater will come down over time with innovation

“while deepwater producers have struggled lately with project execution challenges and rising costs, these are certain to be remedied by time and innovation.”

Deepwater is facing transient challenges

“The deepwater drilling space faces startup challenges, which we believe are transient. A lot of new deepwater rigs have been launched recently with new crews, and these are operating under tighter operational requirements post Macondo.”

Continuing to do business in Russia, old rigs create opportunity

“With regards to Russia as I just mentioned, we are investing in another facility there. We have manufacturing operations for many years in Belarus, which primarily supplies for Russian market. A couple of years ago, we opened another facility in Nizhnevartovsk. And so it’s a market that has a lot of potential. There are something on the order of 800 rigs operating in Russia and most of those are older technology and there is a growing recognition, I think most Russian oil companies for the need for new technology, much like their counterparts in North America and elsewhere around the globe.”

A lot of supply chain issues that they’ve had to work through

“If you look, back, Brad, over the last couple of years, orders began flowing in, in earnest late 2011, 2012, we rebuilt our backlog up to new record levels here more recently. We began to experience supply chain challenges in the first components that go into rigs, which are typically mud pumps. And the as we can’t work through those again those we get better of that, the next kind of way that we saw was rig floor equipments, derricks, finally BOPs last year with the source of some challenges. And then more lately it’s been IMC.”

Broad Declines Typically do Begin in One Segment

This year the Nasdaq is down 3.5% year to date, and is 7.75% lower than it was at its peak in mid March.  The S&P 500 is still flat for the year though.  The fact that the S&P 500 is holding up as the Nasdaq falls could be a sign of broader strength outside of a small segment of companies, but the strength also isn’t atypical of the beginnings of a bear market either.  When a wave of negativity starts to hit markets it often begins in one segment and slowly spreads to others over time.

In 2000 the Nasdaq began to show volatility before the S&P 500 picked it up.  The Nasdaq fell 36% from its peak between March and May of 2000, but the S&P 500 held relatively flat the whole time.  In fact, the S&P 500 finished 2000 lower by 10%, but the bulk of the decline didn’t come until after the summer.

A similar divergence happened in the 2008 bear market too.  Financial companies began to sell off in 2007, several months before negativity was captured by the broader indexes.

Nasdaq vs. S&P 500 2000

Company Notes Digest 4.25.14

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

Lot’s of bright flashing signs that we’re in a late cycle environment this week:

“I would say to you that in terms of the cyclical change I think we are at the high-end here or the trailing end of the cycle” ($AMTD)

Late cycle sign #1: frothy capital markets

Retail investors are coming back into the stock market:

“Our retail channel had its best quarter for net new client assets in three years” ($AMTD)

The environment is perfect to hook a retail investor, bullish sentiment with enough volatility:

“anytime you have the kind of increasingly bullish sentiment that we’ve had over the last 6 to 9 months, and you have increase in volatility, our trading is going to be strong than as it was this past quarter.” ($AMTD)

The casino is open for business:

“Nearly every client engagement metric…was up for the quarter. More clients were logging in; more clients were logged in were trading, and more of the clients trading were trading more.” ($AMTD)

Retail investors are bullish:

“Retail investor behavior continues to suggest an increasingly bullish sentiment” ($AMTD)

They’re inexperienced:

“as investors continue to reengage with the markets, we’re seeing more client interest in tools and education.” ($AMTD)

And they’re getting reckless:

“client cash as a percentage of total client assets ended at 14.8% in the quarter, slightly below our historical range of 15% to 20% and the lowest we’ve seen since September 2007.” ($AMTD)

“margin lending has increased again. So it’s higher now than it was at the end of the quarter” ($AMTD)

Financial buyers coming back into the market for hotels:

“for the past several years, we were only able to sell hotels in ones and twos because the primary buyer was public REITs who would buy a hotel, issue some stock and then come back for another hotel. What we’re seeing now, of course, is much more private equity money and, therefore, a greater interest in portfolio sales.” ($HOT)

Starwood trying to unload properties as fast as possible:

“Moving on to asset sales. We continue to believe the market for hotel sales is becoming deeper with a larger pool of buyers and more buyers looking for portfolio deals. We have a significant number of assets on the market in North America, Europe and Asia. Our intention is to get transactions completed on acceptable terms as fast as we can.” ($HOT)

Non-traditional buyers piling into VC too:

“corporate venture funds and investors, which pulled back significantly during the economic crisis, have been reemerging to support new company formation…corporate venture funds are sponsored not just by technology companies, but by entertainment, auto, apparel, retail, financial and consumer product companies.” ($SIVB)

Largest volume of VC investment since 2001:

“In the first quarter of 2014, venture capitalists invested $9.5 billion in 951 deals, the highest quarterly dollar amount since the second quarter of 2001.” ($SIVB)

The markets are hot, frothiness is to be expected:

“we’re keeping a close eye on valuations. The markets are hot. In our experience, a certain amount of frothiness is expected to be in any hot market.” ($SIVB)

Banking competition is intense:

“Competition remains intense and shows no signs of letting up. Some lenders appear to be stretching for growth at any cost, and we’re seeing more situations where we have to decide whether it makes sense to sharpen our pencils or walk away…you do see people pushing the envelope.” ($SIVB)

Suntrust frustrated by aggressive pricing in CRE:

“on the commercial real estate side, Aleem’s comment was right, I mean we’re frustrated by some of the pricing that’s out there” ($STI)

Late cycle sign #2: construction industry leading

Construction was Caterpillar’s best segment:

“The most positive was Construction Industries. And it was up 20% from the first quarter of last year. And in fact, this quarter, it was our largest segment by sales” ($CAT)

North America leading the construction boom:

“with Construction, I think the one area, geographic area, that’s, I would say, has had the most upside for us is actually North America….I’d say North America is the reason for the upside.” ($CAT)

Construction lending returning:

“I think we are seeing signs that construction levels are picking up and with that that construction lending is an opportunity that’s picking up.” ($CYN)

The cranes are coming back too:

“If we drive around the markets that we’re in, you’re seeing levels of construction, you’re seeing cranes that we all bought four years ago that all moved to China.” ($CYN)

Hotel supply is tight, more on the way?

“At the upper end, new supply is especially scarce, so as long as the U.S. continues its even modest economic growth, it seems likely that high occupancy and rising rates are here to stay for a while.” ($HOT)

Late cycle sign #3: percolating inflation

Occupancy maxed out, so hotels driving REVPAR growth with pricing:

“occupancies once again were pushed to record highs. At this point, you’d expect late-cycle market dynamics in North America with REVPAR growth predominantly coming through higher rates” ($HOT)

DR Horton sees costs rising, especially labor:

“I think costs are going to continue to increase….clearly, labor is one of the cost components that’s going up. And lumber, I don’t think, is going to come down nearly as much as what it did last year.” ($DHI)

Tight labor market for Halliburton in Texas:

“We’ve seen this sort of tightness in labor before. So, we may see some increased costs but the ability to execute and deliver the people, I’m quite confident that we will do that.” ($HAL)

Home prices too high for first time buyers:

“we’re trying to increase our affordable buyer pool in that market because we have seen people coming into our model homes in the D.R. Horton brand, who can’t qualify because of the pricing power that we had over the last couple of years.” ($DHI)

Late cycle sign #4: Chinese Slowdown

A lot of worried eyes on China:

“we’re closely watching growth rates in China. We had a good first quarter in China. In fact, company sales were up 30%. But we’re concerned that if economic growth in China slows enough, it could have an impact on our business.” ($CAT)

Tight liquidity has slowed real estate development:

“On the development front, our view is the tighter liquidity has tempered the pace of real estate development. Many of our new hotels are slated for Tier 2 and Tier 3 markets and are part of mixed-use developments. As a result, the time it takes between signing and opening new hotels has become longer.” ($HOT)

Kimberly Clark hitting a growth wall in China:

“if you looked at China, we’ve been growing at 40 and now I think in the first quarter, we were at 30. We were at 70-ish cities and now we got 90 by the end of last year. We went from 90 to 95 in the first quarter. So the rate of new city expansion is probably slowing a little bit, which is why those numbers are coming down.” ($KMB)

Appendix to the doomsaying: Counter arguments

DR Horton says housing markets staying strong:

“Housing market conditions remained favorable and continue to improve in a manner consistent with our long-stated expectations for the housing recovery. As expected, we are seeing the pace and strength of the recovery vary significantly across our local operating markets, mostly tied to improvement in each markets economy” ($DHI)

CAT agrees housing ok, but not where it was 6 or 7 years ago:

“I think our view of housing is that it will continue, particularly for starts, kind of continue to get better. We think this year is going to be over 1 million. So I think we’re pretty constructive on — at least for the U.S. housing, I mean. But again, you’ve got to put that in perspective. It’s still way below where it was 6 years ago, 7 years ago. So getting better, but not great” ($CAT)

Construction lending terms not frothy:

“think it is noteworthy that I think loans in this space and projects in this space are getting underwritten on a more conservative basis with more capital, more equity in the deal.” ($CYN)

Tech companies better companies than 15 years ago:

“the pre-IPO companies in the market today generally have much stronger business models than the pre-IPO companies we saw 15 years ago” ($SIVB)

Q1 not that bad in China:

“in China. For this first time in over a year, performance was stronger than we expected…Our result was especially good in light of government austerity, not to mention a slight drop in inbound travel to China. We’ve also improved our profit margins despite rising costs.” ($HOT)

Hearing increasingly not awful comments about Brazil:

“I would put Brazil macroeconomic as one or macro situation as one of those we would be watching. I would not put it in the same category as the others that I talked about: China, Ukraine, and maybe a couple of others in the Middle East at all.” ($CAT)


HFT has been good for retail investors:

“most high-frequency trading techniques have been good for retail investors…he retail investor has never had better access to the markets or better execution quality.” ($AMTD)

Retail investors don’t really care about the issues in Michael Lewis’ book:

“trading did not change after Michael Lewis’s book…we have had, I think it’s — let me get them here for you, 70 phone calls and 112 emails on this…it’s not a hot issue with our customers. And our perspective on this is, this is a Wall Street issue, not a Main Street issue.” ($AMTD)

The SEC isn’t signaling that it’s particularly worried either:

“I can say, I have had no discussions with anyone at the SEC in the last two or three weeks.” ($AMTD)

Bank branches are still important for customer acquisition:

“Going forward, you can expect continued rationalization with additional net reductions in our branch network; however, at a slower rate than what we accomplished over the past couple of years, particularly given the importance of a branch and client acquisition and account opening.” ($STI)

Broad based recovery in CRE, except retail still slow:

“We’re starting to see some of that recovery in virtually all categories multifamily, industrial, little less office, retail, clearly, on the bottom of that food group in terms of recovery. So it’s pretty broad-based.” ($STI)

Still not a strong appetite for mortgages to subprime borrowers

“We, from our mortgage company perspective, don’t see a lot of institutions willing to buy [low FICO score] kind of paper.” ($DHI)

Property & Casualty insurance has become a less cyclical industry:

“We’ve been talking about much less amplitude in the cyclicality of our business for a lot more than three to five years. I think you can go back almost 10, certainly 8 where it began to get increasingly clear to us that the factors that we thought had contributed to that remarkable cyclicality were being moderated.” ($TRV)


Low end consumer still muddling along:

“I also mentioned on that last quarterly call…that I was beginning to get the sense that consumer sentiment of our core pawn customer was moving in a more positive direction…I’m still not prepared to declare a turnaround in consumer behavior” ($CSH)

Retailers like selling diapers because they attract a desirable kind of customer:

“I think many of the online retailers want diapers for a lot of the same reasons that other retailers are focused on that category, because they want to get the young family as a regular customer.” ($KMB)

Netflix is finding that it’s expensive to produce high quality original content:

“I think what’s happening is that we are committing to larger budget shows not that the same show is more expensive to make year-on-year. We are looking at kind of shows that we are competing with. We are still only competing with kind of the top end of cable for those shows.” ($NFLX)

Consumers now spending more time online than watching TV:

“last year was the very first time…consumers spent more time in digital…than they did on TV…the average U.S. consumer…spent 4.5 hours per day on TV but 5.75 on digital and that’s largely been driven by mobile.” ($FB)

Advertisers care about being able to measure their spending:

“anything that helps advertisers measure their spend is really important. I’ve talked on the call a bunch about how measuring online and in-store sales really matters. It also matters to marketers to be able to measure their spend compared to other investments they can make.” ($FB)


New man at Microsoft sits in on earnings calls, a positive change:

“my first day, I have said I am committed to an ongoing dialogue with investors. Joining these investor calls going forward is going to be a big part of that, and I am enthusiastic about today’s call.” ($MSFT)

His vision is to focus on cloud and mobility:

“from day one I have had this deep conviction that our vision is about being going boldly into this mobile-first, cloud-first world.” ($MSFT)

Technology industry only respects innovation:

“our industry does not respect tradition, it only respects innovation.” ($MSFT)

Microsoft’s biggest innovation may be pioneering the use of big data to power its own organization. It will be an interesting case study to see if more short term data leads to better long term results:

“I think really it’s a cultural statement about how we are going operate more internally as well. And so maybe that’s the most forward-looking comment I could tell you which is that being empowered to look weekly, monthly and see how we can get better and better and better. And I think that’s actually driven a lot of excitement around here.” ($MSFT)

Still a lot of growth to be realized in the smartphone market:

“what I see as the bigger opportunity for Apple is that the smartphone market is still only 1 billion or so units and it will eventually take over the entire mobile phone market.” ($AAPL)

Emerging markets have always bought older generation phones, iPhone 4s leading the way in China:

“The addition of China Mobile coupled with great response to our more affordably priced iPhone 4S led to an all time quarterly record for iPhone sales in Greater China.” ($AAPL)

Even in the US there is still plenty of room for upgrades:

“we still have about 22 million 3G smartphones and a little more than 23 million basic phones in our base which provides us with a good opportunity to move customers upgrade 4G smartphones.” ($VZ)

It’s possible that the carriers’ new pricing schemes will lead to more phone upgrades:

“I do believe that upgrades may increase with EDGE, but again I think it’s too early to tell.” ($VZ)

The new schemes aren’t designed to push customers in any specific direction, just about giving them more choices:

“this comes down to personal choice and again our sales forces is not compensated to drive traffic to any one sort of plan. At the end of the day, it’s all about customer satisfaction and treating our customers and the choices that they want. So, again, its – the way I look at this is, as we manage the business, these plans are all profitable plans to us. So it comes down to customer choice” ($VZ)

Remember, the changes in carrier pricing policies is only in the US:

“the things you’re seeing in the U.S. are not occurring in many of the other geos in terms of the upgrade policies and so forth. I mean, each country has its own kind of cadence associated with this, and the U.S. is – it’s in the 30% of our business, not 100%.” ($AAPL)

Not surprisingly, Netflix is against the Comcast TWC merger:

“we are in opposition to the Comcast, Time Warner merger because we are really concerned about what happens when the combined entity, if the merger were to go through, would have with over 60% of U.S. homes passed and eventually over 50% of U.S. homes subscribing to cable Internet and that’s a worrisome factor” ($NFLX)

Probably because they had to pay Comcast a ransom:

“we did end up choosing to pay Comcast to improve the video quality that our members experience. We don’t think we should have to, but in the short-term we felt like we had no choice.” ($NFLX)

Materials, Industrials, Energy

Halliburton’s CEO thinks that higher natural gas prices are sustainable:

“If we look at LNG export clearly a positive and its moving the right way, if we look at sort of the uptake on gas and its positioning in the market as long-term, fuel for electricity and then we look at sort of the economy and the upside in this economy, all of those conspire to in my view a sustainable gas market.” ($HAL)

The oil service industry has been running for years with only one engine working. If gas comes back it could be huge:

“I mean, its clearly in my view more than a two-year cycle, because as I indicated earlier, we are not getting any help from gas essentially at this point in time. And I have a view on gas, I happen to believe that over the next five to 10 years, the gas market is going to be there and potentially be there in a big way.” ($HAL)

The mining industry remains mired in a downturn. CAT thought it would get better but it hasn’t:

“Despite the prospects for a better year in the world economy and continued strong production at mines, mining orders for new equipment haven’t really improved and remain at pretty low levels…Our outlook from January expected mining orders for 2014 to remain low, but be modestly better than the second half of 2013. So far this year, that hasn’t happened.” ($CAT)

Metallurgical coal prices are unsustainably low, but likely soft through 2014:

“current price levels are unsustainable for much of the 325 million tons of seaborne met production in operation today. Yet despite some of the supply corrections that have taken place, we expect metallurgical markets to remain soft throughout 2014.” ($ACI)

Arch thinks we’ve hit bottom in Met coal prices though:

“I think we have bottomed out. And I think given where people’s cost structure are and the fact that you’ve got a large percentage of suppliers in the world market that have a cost structure that don’t work, something’s got to change.” ($ACI)

With supply coming off-line, the market could rebalance quickly:

“I think you are starting to see the early part of that with some of these cut backs…on a 325 million ton market, it wouldn’t take a whole lot to balance this thing pretty quick.” ($ACI)

If everyone can ramp back up quickly, how long will the rebalance last though?

“on the flip side when the market does come back, we will have the opportunity to ramp these mines back up rather quickly” ($ACI)

At least thermal coal is rebounding:

“One market where recovery is evident is the domestic thermal market.” ($ACI)

Miscellaneous Nuggets of Wisdom

Satisfied customers are your best sales people:

“When members are really satisfied they tell their friends about the service and they retain better.” ($NFLX)

Building a good product is an iterative process:

“If we are very fortunate, we will have programmed it completely correctly from day one. More likely we will figure out some stuff’s working, some stuff’s not. We will adjust the formula” ($NFLX)

Look at every opportunity, but be selective about which risks you underwrite:

“we’ll look at anything because you always learn by whatever you look at, but our interest is very selective.” ($TRV)

Set aspirational goals for your organization even if they may seem impossible to achieve:

“At this level of interest rate, I’m still not 100% convinced that [our long term ROE target] is achievable in today’s environment…it remains an aspirational goal. I think that it’s critical in an organization to express a strategic goal, and absent something fundamentally changing that’s permanent, sticking with it. It’s not just words that we use here in a webcast; it’s embedded in the systems by which we price product, it’s embedded in the systems by which we evaluate risk selection. It’s what people in the field, underwriters, understand their mission to be, so we don’t mess with it lightly. We leave it as is because it takes so long to get the DNA of an organization to reflect these strategic initiatives.” ($TRV)

Sacrificing margins for growth is foolish. You end up sacrificing returns on capital:

“We also don’t believe that you can on the margin grow your business by cutting price marginally. I think – we think that’s just a fool’s approach to the business. If you really want to use price as that type of a competitive approach, you’ve got to cut it to the point where you’ll accept materially lower returns than anybody else. That will change it, and my guess is it will be at a level of profit that is simply unsupportable for the long term. So we at least, we reject the notion that you can moderate pricing to grow your business.” ($TRV)

Don’t grow by cutting price, grow by identifying your competitive advantages:

“We try really hard to grow our businesses, and in many cases we’ve been extremely successful. It’s not been based on price; it’s been based on risk selection – importantly, identifying the competitive advantages that you have in your business and applying them more broadly to business opportunities that arise.” ($TRV)

City National Bank 1Q14 Earnings Call Notes

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

Strength in C&I, residential and commercial mortgages

“C&I lending which increased 19% from the first quarter of last year was responsible in this quarter for just over two-thirds of the growth linked quarter-to-quarter. Residential and commercial real estate mortgages also made strong contributions.”

Rising optimism in client base

“Overall, we are seeing rising optimism in our client base.”

Seeing strength across the board

“I think that we’re seeing it across the board as I was just suggesting; technology, franchise, finance, equipment leasing, construction I mentioned, commercial and residential real estate mortgages. We’re still seeing very strong purchase activity in the mortgage space in our client base.”

Most pressure in middle market lending

“middle market lending is where there’s the most pressure. I mean you have less people doing real estate lending or I think you’re seeing some of that’s come back now, it might help us. People have flocked into that and that’s put more pressure on the pricing behind that price and I said a little bit around the specialty areas tend to have less pressure but by the way some of them, franchise get some pressure on the pricing.”

Construction coming back

“I think we are seeing signs that construction levels are picking up and with that that construction lending is an opportunity that’s picking up. I think it is noteworthy that I think loans in this space and projects in this space are getting underwritten on a more conservative basis with more capital, more equity in the deal. So, we’re encouraged by that but it’s a little early in the year to really know for sure. But we think there’s going to be some positive growth here on a sound footing for City National. If we drive around the markets that we’re in, you’re seeing levels of construction, you’re seeing cranes that we all bought four years ago that all moved to China.”