Big Week with the FOMC and Apple – Various and Sundry Topics

Thanks to Jeff Miller (www.dashofinsight.com) for including this blog in his latest post. Jeff notes that the Friday, 11/1/19 nonfarm payroll report could see 75,000 less jobs thanks to the GM strike. Street consensus is expecting 80,000 to 100,000 “net new” jobs created in September ’19 so with the GM reduction and the already low number, expectations coming into the key report are low already. Personally I think that is a plus.

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Financialization

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Here is a post from Samanatha LaDuc’s blog about Texas Instruments (this weekend) and a concept that was recently read about also on Howard Lindzon’s “Lindzanity” blog, with Texas Instruments also being the subject of of one of Jim Cramer’s “Mad Money” segments after Texan’s recent earnings miss.

As an investor and a long-term investor at that, I’ve modeled both Texas Instruments and Intel since the mid-1990’s and have owned and do own both stocks for clients. The reason Texas Instruments bought back so much stock and really a key aspect to why Intel has dramatically under-performed Texas Instruments has more to do with “capital intensity” and the amount of capex required to maintain their business model.

In the late 1990’s and early 2000’s, Texas Instruments spent 25% – 30% their cash-flow reinvesting back in the business in the form of capex. For Intel that same number is 45% – 50%. Intel has a much more “capital intensive” fac requirement. Texas Instruments diversified into less-intensive manufacturing facilities and started generating much more free-cash-flow. Intel’s free-cash-flow only covers net income by 50% or sio the last few years while Texas Instruments free-cash-flow had 100% coverage of net income from 2013 forward.

Texas Instruments have been generating excess free-cash for the last 6 – 7 years, and a lot of it went back to all shareholders, not just executives. Here is an article written for Seeking Alpha about Intel’s Achilles Heel and how capital intensity impacts long-term returns.

Here is a long-term returns chart of Texas Instruments, Intel and the SP 500 off the March, 2009 low.

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Texan has been a HUGE out-performer post-2008. One clients maintains a long position in Texan bought in July, 2009 at $23 per share.

The author Ben Hunt notes the SG&A and R&D expense reduction and made just a passing reference to capex. And Ben writes the article as if a company with lower revenue growth who reduced their cost structure and the capital intensity of their business is somehow misguided or unethical. If Intel had done followed the same logic, and the stock was at $150, would Intel be cited for “financialization” ? Their shareholders have suffered through below-benchmark and sub-par returns for 20 years now. Does that make Intel more commendable than the Texan ?

Ben’s real point (I think) was the incentive stock options given to management and the price they were awarded at versus the price they were sold, but Warren Buffett talked about this same incentive process and referred to it in one of the Berkshire annual reports as the “buy-high-and-sell-low” approach.

Ben’s point was that 40% of the buyback went to senior management dilution offsets, but that means 60% went to shareholders and employees.

With all due respect to Ben, “financialization” just seems to be another name for incentive stock options grants for successful companies. It was cited numerous times in the late 1990’s, which doesn’t make it right, just capitalism.

(By the way Ben Hunt is a great writer, and Samantha LaDuc (@SamanthaLaDuc) is a friend and someone whose blog I’ve sought out as a blog for “non-consensus opinions” and I heard Howard Lindzon speak at this year’s WealthStack and loved his straight-forward, no-BS speaking style, so none of this is in anyway to be construed as a personal attack. I do think it’s just another “capitalism is bad” article while i think the Texan saw the post-2008 environment and took appropriate action for shareholders and employees.) Many company’s have done this over the years, not just Texas Instruments.

 

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Speaking of WealthStack

Several people have asked what U thought of WealthStack this year and I thought it was great. The two best panels in my opinion were Allison Schrager’s “An Economist Walks Into a Brothel” discussion, which is the title of her book analyzing and discussing the economics of the sex-trade business and how assessing risk and pricing return can be done at the most fundamental of levels. As readers would expect, the discussion was tastefully done, and respectful of the audience, but also quite entertaining with more than a few laughs. The other panel i found personally informative, was Matt Hougan’s discussion the final day of the Bitcoin and crypto-currency market and how it has evolved since it’s inception, Matt is the former CEO of ETF’s.com and is now President and CEO of Bitwise Asset Management. I heard that since the conference, a new bitcoin ETF was rejected by the SEC, which was sponsored by Bitwise, but I bet Matt will keep trying.

There was a great panel on ETF’s where i got to hear Ben Johnson of Morningstar speak. There were any number of what were decent topics which i didn’t get to hear only because I was listening to another panel.

Knowing Ritholtz Wealth, I’m sure the conference will be even bigger and better next year.

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Ed Yardeni thinks the SP 500 will be at 3,100 by year-end 2019, and 3,500 by year-end 2020. That is a 3% return over the next 9 weeks and a 12.9% expected return for 2020 per the math. As this “market breadth” post from this blog noted last night, the market internals seem ok. Sentiment has gotten bullish again, but that’s been the pattern all year.

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Walgreens (WBA) reports their fiscal Q4 ’19 quarter before the opening bell Monday morning, and the stock is sporting a 7% free-cash-flow yield. The issue is that with this fiscal Q4 ’19 report dated August 31, the Street is still expecting no growth for fiscal 2020. Fiscal ’18’s expected EPS is $5.98 but the fiscal 2020 estimate as of tonight is now $5.96. Expectations are very low so much will depend on 2020 guidance. Walgreen’s is now one of your traditional value stocks but it’s a poster-child for Brexit (acquired Alliance Boots, which are all over the UK, the opiod crisis (Walgreens was not part of the Ohio settlement last week) and reimbursement pressure. Add on top of that brick-and-mortar retail pressure, and well – you know. There is a lot of bad news in the stock, but for a reason.

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The FOMC announcement comes Wednesday, and then Apple’s earnings release after the close. Google reports Monday after the close.

Thanks for reading.

Brian

 

 

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