Johnson Controls: A Double Play (Unfortunately) JCI

I'm not sure that the automotive side is going to be a big winner until personal income tops the 2007 figure.
Despite a glowing cover story the stock is only up 1.9% ay 27.89. From Barron's:
Totally In Control 

Johnson Controls is greening the Empire State Building—and investors' wallets. A promising play on an auto revival and a cleaner world.

JOHNSON CONTROLS IS THE RARE COMPANY whose name is also a declaration—and an apt one.

Johnson controls the temperature and mechanical functions in offices and schools, through its building-management business. Johnson controls, more than any other supplier, the power supply and interior feel of the world's cars, through its automotive-battery and seating divisions. And Johnson controls its business with uncommon discipline, long-term planning, a focus on the best-positioned industry segments and regions, shrewd allocation of capital and a shareholder-friendly orientation.

Pair these attributes with what looks to be a multi-year rebound in auto production, and fast-growing demand for greener, cleaner and less costly building-maintenance technologies, and it would seem the company's stock, at an undeservedly modest valuation of less than 12 times next year's expected earnings, could outperform significantly in coming years.

Considering its nearly $20 billion market value and 125-year history, Johnson Controls (ticker: JCI) is among the country's quieter corporate icons, befitting its Midwestern heritage and the behind-the-scenes role played by its products as components of much larger systems. Warren Johnson patented the thermostat in 1883, one of 50 patents he secured, most involving the regulation and deployment of heat and energy. This focus on the delivery of power and comfort, when and wherever it is needed, links Johnson Controls' three major business divisions today.

The largest of the three, which the company calls Automotive Experience, provides car-interior components—mostly seats and dashboard-control panels—to auto manufacturers. Power Solutions makes car batteries, for both auto makers and the after-market. Johnson Controls is the market leader in both of its auto-supply businesses.

But recently the fastest-growing division has been Building Efficiency, which makes and services products used in the heating, ventilation, security and lighting of large buildings for governments, colleges and big corporations. As its most prominent assignment, the company is leading the retrofitting of all mechanicals in the nearly 80-year-old Empire State Building, for which it will guarantee energy-cost savings that will pay for the project in less than four years.

THE BUILDING-CONTROLS UNIT represents a long-term bet on the interest of big landlords in integrating and outsourcing critical building functions to pursue cost savings and optimal building performance. New technologies that automate temperature control, air flow, lighting, elevator operation and security are allowing companies such as Johnson Controls, Honeywell International (HON), Siemens (SI) and United Technologies' (UTX) Carrier division to create stable and nicely growing businesses in this largely invisible role.

Temperature Rising

The shares have tripled from their 2009 low and could keep running to the high 30s.

None

Johnson Controls dramatically raised its profile in this arena five years ago with the acquisition of York International. The deal was widely praised as well-executed and indicative of the company's record of value-creating acquisitions, a relative rarity among large companies. Revenue and profits from the building-controls area more than doubled between fiscal 2005 and 2009 (Johnson's fiscal year ends Sept. 30), and its contribution to the company's total revenue rose to 37% in the first nine months of fiscal 2010 from 21% in fiscal 2005.

This has made Johnson Controls, which still is viewed too often as a a pure auto-parts supplier, into a better-diversified and less cyclical industrial company. Not that a better balance allowed the company to sidestep the auto sector's slide amid the recession of 2008-'09, when its auto-related revenue fell by a third. But it helped Johnson weather the collapse better than it otherwise might have, and gain market share at the expense of financially weaker competitors, leaving it well positioned to meet long-term financial targets.

JOHNSON'S THREE DIVISIONS together had revenue of $28.5 billion in the fiscal year ended Sept. 30, 2009. But the company swung to a loss of $338 million, or 57 cents a share, from year-earlier net of $979 million, or $1.63 a share, as global auto sales collapsed in the financial crisis and recession.
The shares also took a body blow as automotive and commercial real-estate markets seized up, falling to below 9 in March 2009 from a high above 40 late in 2007.

Johnson trades for about 28, which leaves the stock valued at 14 times forecast earnings of $1.96 a share for the fiscal year ending next month, and 11.5 times fiscal 2011 estimates of $2.42. That represents an unwarranted discount to a blend of the company's industrial-conglomerate and auto-supplier peers, which command price/earnings ratios closer to 12 to 14 times next year's projected profits. Some analysts think the stock could trade up to the mid-30s in the next year, as the dimensions of the company's recovery become clear. At the peak of its profitability, in 2007, Johnson earned $2.16 a share, on revenue of $34.6 billion....MUCH MORE

Underrated Power

Despite its business mix, including a stable revenue stream from building-control products and services, Johnson' Controls shares are valued more like a pure auto-supply company than the well-managed industrial conglomerate.

	Recent	Market	2010E	2010E	2011E	2011E	Div
Company/Ticker	Price	Val (bil)	EPS	P/E	EPS	P/E	Yield
Johnson Controls/JCI	$27.91	$19	$1.96	14.2	$2.42	11.5	1.9%
Eaton/ETN	75.68	13	5.05	15.0	6.13	12.3	3.1
Honeywell Intl/HON	41.29	32	2.52	16.4	3.04	13.6	2.9
Ingersoll-Rand/IR	35.26	11	2.32	15.2	2.93	12.0	0.8
Lear/LEA	77.81	4	5.39	14.4	7.49	10.4	NA
United Technologies/UTX	70.58	66	4.71	15.0	5.35	13.2	2.4
Source: Thomson Reuters

"What Caffeine Actually Does to Your Brain"

From Lifehacker:

For all of its wild popularity, caffeine is one seriously misunderstood substance. It's not a simple upper, and it works differently on different people with different tolerances—even in different menstrual cycles. But you can make it work better for you.


We've covered all kinds of caffeine "hacks" here at Lifehacker, from taking "caffeine naps" to getting "optimally wired." And, of course, we're obsessed with the perfect cup of coffee. But when it comes to why so many of us love our coffee, tea, soda, or energy drink fixes, and what they actually do to our busy brains, we've never really dug in.
While there's a whole lot one can read on caffeine, most of it falls in the realm of highly specific medical research, or often conflicting anecdotal evidence. Luckily, one intrepid reader and writer has actually done that reading, and weighed that evidence, and put together a highly readable treatise on the subject. Buzz: The Science and Lore of Alcohol and Caffeine, by Stephen R. Braun, is well worth the short 224-page read. It was released in 1997, but remains the most accessible treatise on what is and isn't understood about what caffeine and alcohol do to the brain. It's not a social history of coffee, or a lecture on the evils of mass-market soda—it's condensed but clean science.
What follows is a brief explainer on how caffeine affects productivity, drawn from Buzz and other sources noted at bottom. We also sent Braun a few of the questions that arose while reading, and he graciously agreed to answer them.

Caffeine Doesn't Actually Get You Wired

Right off the bat, it's worth stating again: the human brain, and caffeine, are nowhere near totally understood and easily explained by modern science. That said, there is a consensus on how a compound found all over nature, caffeine, affects the mind.

Every moment that you're awake, the neurons in your brain are firing away. As those neurons fire, they produce adenosine as a byproduct, but adenosine is far from excrement. Your nervous system is actively monitoring adenosine levels through receptors. Normally, when adenosine levels reach a certain point in your brain and spinal cord, your body will start nudging you toward sleep, or at least taking it easy. There are actually a few different adenosine receptors throughout the body, but the one caffeine seems to interact with most directly is the A1 receptor. More on that later.

Enter caffeine. It occurs in all kinds of plants, and chemical relatives of caffeine are found in your own body. But taken in substantial amounts—the semi-standard 100mg that comes from a strong eight-ounce coffee, for instance—it functions as a supremely talented adenosine impersonator. It heads right for the adenosine receptors in your system and, because of its similarities to adenosine, it's accepted by your body as the real thing and gets into the receptors.
Update: Commenter dangermou5e reminds us of web comic The Oatmeal's take on adenosine and caffeine. It's concise:

More important than just fitting in, though, caffeine actually binds to those receptors in efficient fashion, but doesn't activate them—they're plugged up by caffeine's unique shape and chemical makeup. With those receptors blocked, the brain's own stimulants, dopamine and glutamate, can do their work more freely—"Like taking the chaperones out of a high school dance," Braun writes in an email. In the book, he ultimately likens caffeine's powers to "putting a block of wood under one of the brain's primary brake pedals."

It's an apt metaphor, because it spells out that caffeine very clearly doesn't press the "gas" on your brain, and that it only blocks a "primary" brake. There are other compounds and receptors that have an effect on what your energy levels feel like—GABA, for example—but caffeine is a crude way of preventing your brain from bringing things to a halt. "You can," Braun writes, "get wired only to the extent that your natural excitatory neurotransmitters support it." In other words, you can't use caffeine to completely wipe out an entire week's worth of very late nights of studying, but you can use it to make yourself feel less bogged down by sleepy feelings in the morning....MORE

"How Moore’s Law Has Spoiled Us for The Energy Revolution"

A major piece by earth2tech's Katie Fehrenbacher:

Moore’s Law and the fast pace of innovation in computing and the Internet have deeply spoiled and confused us in terms of how fast the pace of innovation should be for other sectors like energy. That was the basic sentiment from Microsoft Chairman and former CEO Bill Gates at the Techonomy event last week (video here), and the idea explains a lot in terms of energy entrepreneurs’ and investors’ missteps and motivations.

In 1965, Gordon Moore famously predicted that the number of transistors on a chip would double roughly every two years. The result is that over 40 years later semiconductors are cheap and powerful enough to be embedded into everything from our bus passes to our library books, and the platform of personal computing has delivered our current always-on Internet-based society. Without chip innovation and Moore’s Law, there’d be no Facebook, Google, or the iPhone.

But, as Gates put it last week, we’ve been fooled by the rapid success of IT, and “there are things that just don’t move forward.” The pace of chips and IT innovation “is rare,” said Gates.
Unfortunately, some of those “things that don’t move forward” are fundamental platforms for the energy industry. For example, as Gates pointed out: batteries. “Batteries have not improved hardly at all. There are deep physical limits,” to this technology, he said.

The standard lead acid and lithium ion batteries, which power our gadgets and laptops, have undergone only very minor improvements, despite the fact that in the past couple of years entrepreneurs and investors have tried to inject innovation into the space. Gates himself said that he is investing in five battery startups, while he’s looked at another 50 battery startups in the market place.

Another energy technology that has completely stalled is nuclear power. That stopped moving in the 1970s, Gates noted, and a major barrier for innovation has been the length of time that it takes to get a nuclear project approved and built in the U.S. “Most of us would like to work on things that happen during our lifetime. The lack of investment in this space is very understandable,” said Gates.

Gates is also trying to use his resources to inject innovation into nuclear power. He’s backed (and is “deeply involved with” he said at Techonomy) nuclear startup TerraPower, which is a spinoff project from Intellectual Ventures, an incubator founded by former Microsoft chief technology officer Nathan Myhrvold. TerraPower uses a “traveling wave reactor design,” that uses waste uranium to power it and can provide energy for hundreds of years without having to be refueled.

The Moore Effect on Greentech VCs...MORE

Why Cleantech Companies are IPOing (AONE; CDXS; TSLA)

Short answer, they have to.
From Greentech's Cleantech Investing:

As an active investor in the cleantech market I'm definitely hoping we can start to see some successful exits.  I, like others, am pining for a few successful IPOs with stellar returns that can be good beacons of hope for the rest of the sector's bets.  When there were practically zero venture-backed IPOs across all sectors, you knew there was a backlog of cleantech companies that were lining up to IPO and couldn't.  And of course now that the IPO window is re-opened slightly, it's not surprising to see venture-backed cleantech startups jumping in and filing to go public.

But why are THESE the ones that are doing so?  A123, Codexis, Tesla, Amyris, PetroAlgae, Gevo... Several with no or little revenue, really looking to 2012 or beyond for their significant revenue growth. Not all bad companies, that's certainly not my point, some on this list may end up being very successful.  But certainly not the exact same short list one would have come up with a year ago when guessing which companies would be READY (note: not WANTING) to IPO as soon as the IPO window reopened.  And certainly a couple of stories with some real hair on them.

So why these companies?  I'm increasingly believing that these companies aren't IPOing as a result of the same reasons dotcom startups were IPOing in 1999.  It's not that there's overexuberance, and investors and management are eager to put companies out into the market too early simply because they know they can get great returns from an overly optimistic stock market eager to get a piece of the Next Big Thing.

No, these companies are IPOing because they pretty much have to.  The current investors are fatigued, new venture funders are hard to find, the companies are burning cash very quickly, and with the IPO window open getting another venture financing round from the stock market seems the best solution.  Even if the IPO isn't primed to "pop" and be a great IPO story.  And in some cases, when you dive into the details of the S-1, you see that the existing funders have put the company in a position where it's IPO or else...MORE

"Spearfish Oil Formation could be Another Bakken Oil Boom for North Dakota" (EOG)

From Next Big Future:

Lynn Helms is director of the North Dakota Department of Mineral Resources indicates that oil companies are expecting to drill 50 wells this year to figure out the edges of the primary part of the spearfish play, and 50 to 100 next year, and then they really expect to go into full development mode. They could drill anywhere between two and seven thousand wells up there. In Caanda, the formation is called the Waskada. It appears to be another thin oil structure over a large area and is being unlocked the horizontal multi-fracturing drilling. It will be interesting to see if this oil formation also becomes significant for Canada.

The Spearfish oil is at a shallower depth than the Bakken oil, so it should be cheaper to drill the Spearfish.

They plan on drilling as many as 30 wells in each square mile for this Spearfish play so it's going to be very intense from year three through year ten it is going to be a huge amount of drilling rigs and trucks and people migrating in to the Souris area in central Bottineau County

EOG drilling Spearfish wells in four (4) days. EOG released statement saying the Spearfish is a significant discovery. Back in April, 2010 it was believed to be relatively small -- estimated at 20 million barrels -- it has a very high rate of return. They can drill these wells in less than five days for a cost of about $1 million. The Waskada field north of the border is estimated to be 25 million barrels. EOG says they can get a return on the order of 70 - 100%....MORE

Hurricane Watch: "A record quiet start to the 2010 Northern Hemisphere tropical cyclone season"

From Wunderblog:

...Why so quiet in the Atlantic?
The Tropical Atlantic is quiet, and there are no threat areas to discuss today. The Invest 93 system we were tracking has been destroyed by dry air and wind shear. There are a couple of long-range threats suggested by some of the models--the GFS model predicts a tropical depression could form off the coast of Mississippi six days from now, and the NOGAPS model thinks something could get going in the Gulf of Mexico's Bay of Campeche seven days from now. Neither of these possibilities are worthy of concern at present. Overall, it's been a surprisingly quiet August, considering the pre-season predictions of a hyperactive season.

According the National Hurricane Center, this hurricane season has been exactly average so far. There have been three named storms and one hurricane as of August 12. The average date of formation of the third named storm is August 13. One hurricane typically forms by August 10. One reason for this year's inactivity may be an unusual number of upper-level low pressure systems that have paraded across the tropical Atlantic. These lows, also called Tropical Upper Tropospheric Trough (TUTT) lows, tend to bring high wind shear that inhibits tropical cyclone formation. The other major factor appears to be that vertical instability has been unusually low in the Atlantic over the past month. Instability is measured as the difference in temperature between the surface and the top of the troposphere (the highest altitude that thunderstorm tops can penetrate to.) If the surface is very warm and the top of the troposphere is cold, an unstable atmosphere results, which helps to enhance thunderstorm updrafts and promote hurricane development. Since SSTs in the Atlantic are at record highs, enhancing instability, something else must be going on. Dry air can act to reduce instability, and it appears that an unusually dry atmosphere over the Atlantic this month is responsible for the lack of instability.


Figure 2. Vertical instability (in °C) over the Caribbean (left) and tropical Atlantic between the Lesser Antilles Islands and coast of Africa (right) in 2010. Normal instability is the black line, and this year's instability levels are in blue. The atmosphere became much more stable than normal in both regions at the end of July. This lack of instability also extends to the Gulf of Mexico and North Atlantic Ocean between Europe and North America, as well as the Western Pacific east of the Philippines, and the South Indian Ocean. Image credit: NOAA/CIRA.

A record quiet start to the 2010 tropical cyclone season in the Northern Hemisphere
What is really odd about this year, though, is the lack of tropical cyclone activity across the entire Northern Hemisphere. Usually, if one ocean basin is experiencing a quiet season, one of the other ocean basins is going bonkers. That is not the case this year. Over in the Eastern Pacific, there have been five named storms and two hurricanes. The average is seven named storms and four hurricanes for this point in the season. This year's quiet season is not too surprising, since there is a moderate La Niña event underway, and La Niña conditions usually supresses Eastern Pacific hurricane activity. But over in the Western Pacific, which usually generates more tropical cyclones than any ocean basin on Earth, it has been a near-record quiet season....MORE

First Solar's China Project Not a Done Deal (FSLR)

From the Washington Post:
Solar plan in China's Inner Mongolia highlights pitfalls for U.S. firms

With great fanfare, an Arizona-based energy company signed a preliminary agreement with China last fall to build the world's largest solar-power plant in the Mongolian desert.
The deal was hailed as the first major example of the United States and China cooperating on a big-ticket energy project, and the largest foray by a U.S. company into Asia's fast-growing alternative- energy market. The agreement became a centerpiece achievement of President Obama's visit to China last November.
Nearly a year later, the deal has not been completed and there is growing skepticism as to whether it will happen.

Chinese competitors in the solar business have complained openly about the U.S. company, First Solar, getting such a lucrative contract. A planned June 1 date to break ground has been missed. Government officials from the Chinese region of Inner Mongolia, where the plant would be built, say they plan to open the project to competitive bidding.

Many solar-industry insiders now say the deal, outlined in a "memorandum of understanding," was mainly a showpiece for Chinese officials to demonstrate support for one of Obama's signature initiatives, strategic energy cooperation....MORE

HT: earth2tech
Previously:

First Solar’s Gift to China: How to Build a Solar Farm (FSLR) 

"First Solar awaiting China decision on subsidy" (FSLR)

"EPA proposes rules on greenhouse gas permits"

Swell.
The chickenshit politicians ducked the issue and now we're looking at a monstrosity.
The EPA's tailoring rule is probably unconstitutional and has been challenged from the left and the right.
The Sierra Club and Peabody Energy singing Kumbaya together does however, bemuse.
From Reuters:

The U.S. Environmental Protection Agency on Thursday proposed new rules to ensure factories and power plants will be able to obtain permits they will need to emit greenhouse gases starting next year.
The proposed rules, which the EPA wants to finalize before January 2 next year, are largely an administrative measure that is necessary for the agency to implement its mandate to take steps on emissions blamed for warming the planet.

Earlier this year, the EPA finalized rules that require factories and power plants starting next year to get air permits for emitting greenhouse gases when they retool or add capacity. Those rules cover large industrial facilities that are responsible for 70 percent of the emissions from stationary sources.
Thursday's rules "will help ensure that these sources will be able to get those permits regardless of where they are located," the EPA said in a release.

The rules would "require permitting programs in 13 states to make changes to their implementation plans to ensure that (greenhouse gas) emissions will be covered."...MORE

Earnings Conference Calls: "How Can You Tell If A CEO Is Lying?"

From the WSJ's Deal Journal:

Conference call Q&As are a confusing and cryptic dance. Executives try to be attractive to investors, without giving away too much. In many cases, they are trying to put a good spin on bad results.
But what if an investor could read right through all of the posturing and careful prose to know if they were being strung along?

A pair of professors at Stanford recently tried to do just that. The team built a model that tries to flush out executive lies, using psychological and linguistic studies and transcripts of conference calls from companies that later restated earnings.

They fed their filter almost 30,000 earnings transcripts from 2003 to 2007 and found that it worked quite nicely. Executives who later had to revise their books displayed some very consistent clues.

For one, they seldom referred to themselves or their firms in the first person; “I” and “we” were replaced by terms like “the team” and “the company.” Deceitful executives passed up humdrum adjectives like “solid” and “respectable” in favor of gushing words like “fantastic,” and (not surprisingly) they seldom mentioned shareholder value....MORE

News from North Korea: "Talks about Talks Yield No Talks"

The headline pretty much says it all.
If you're interested DailyNK has the story.

HT: Marginal Revolution

T. Boone Pickens No Score: Clean Energy Fuels Settling Back While Call Buyers Proliferate (CLNE)

This one should be a natural for me to follow. It is as much an example of Political Capitalism as it is a business, and seeing that I hang out at the intersection of money and politics it should be a case study.
Instead I am bored by Boone and his machinations.

The company reported a smaller loss on Monday but the news did nothing to stem the erosion of the stock price. Last trade $15.53, down 36 cents.
Here's the earnings call transcript and here's Schaeffer's Research on the options action:

Traders are taking sides on Clean Energy Fuels Corp. (CLNE) and Star Scientific, Inc. (CIGX). Calls were popular on CLNE yesterday, while puts were the options of choice on CIGX -- extending a recent trend for both securities.
Clean Energy Fuels Corp.
CLNE drew unusually heavy call volume on Wednesday, with 2,561 contracts crossing the tape -- about 1.02 times the equity's expected daily call activity. During the course of the session, traders on the International Securities Exchange (ISE) bought to open 1,071 calls on CLNE, compared to just 81 puts. The security's single-day ISE call/put volume ratio of 13.22 highlights a distinct preference for bullish bets over bearish.
The day's optimistic skew was part of a growing trend on the ISE, where CLNE has racked up a 10-day call/put volume ratio of 11.32. This ratio ranks higher than 93% of comparable readings taken during the previous year, revealing that traders on the ISE have purchased calls over puts at a faster clip just 7% of the time.
Zeroing in on the equity's near-term open interest configuration, CLNE's Schaeffer's put/call open interest ratio (SOIR) stands at a relatively tame 0.73, in the 46th annual percentile. While this reading is tilted ever so slightly toward the bullish end of the spectrum, it seems that upbeat sentiment is still far from climactic levels among near-term options players.
Accordingly, it was a December-dated strike that commanded most of the call-buying attention on Wednesday, as call players concentrated their efforts at CLNE's December 20 strike. This out-of-the-money option saw 1,108 contracts change hands yesterday, with the majority trading at the ask price. Open interest rose overnight by 271 contracts, confirming that new calls were added here.
In fact, in the August series, it's a put option that holds the title of most heavily populated strike. CLNE's August 16 strike is home to peak put open interest of 3,968 contracts; meanwhile, peak call open interest consists of just 3,532 contracts at the August 17 strike. CLNE is currently trading just shy of $16, so front-month traders are favoring at-the-money puts and out-of-the-money calls....MORE

More about Matt Simmons

From the Houston Chronicle's NewsWatch: Energy blog:

Newspaper obituaries are never enough to capture the full measure of a person, so I thought we'd come back to more on the reaction to the death of energy banker/prognosticator Matt Simmons.
Generally people tend to be effusive in their praise of the recently deceased, but I could personally agree with some of the comments about Simmons' personal friendliness (despite his willingness to make some cutting comments).
Attorney Tom Kirkendall over at Houston's Clear Thinkers used to have an office near Simmons and enjoyed running into him in the building:

Matt was a joy to talk with -- witty, intelligent and interesting. That's one of the reasons why, over the past decade or so, he became a media favorite for providing his provocative opinions about the energy industry. Matt enjoyed his new role as one of the media's energy industry pundits, but that wasn't the best fit for the chairman of a company that was often advising companies that could be affected by his controversial opinions.

Reporter and author Robert Bryce mentioned his personal warmth, too, in a piece we reprinted:

Matt Simmons was always incredibly kind toward me. I first interviewed him in early 2001 about the potential for energy shortages in California. In 2008, he wrote a highly favorable blurb for my third book, Gusher of Lies. I last interviewed him in April 2009, at his office in Houston. He was excited about the possibilities offered by energy harvested from the ocean and about his new venture, the Ocean Energy Institute. When the interview was over and I stood to leave, he wished me luck, and asked me to keep in touch.

Nick Snow at Oil & Gas Journal noted an incident soon after Simmons' brother took a stake in a trade publication where Snow worked:

... the two of them tracked me down during the Offshore Technology Conference because I had cited a Simmons & Co. International report in one of my stories. They weren't satisfied until I assured them I'd used the material because it was good, and not because it came from a company run by the brother of one of the newspaper's new owners.

Even Christopher Helman at Forbes, who called Simmons "the crazy old uncle of the oil patch" for his recent BP oil spill theories, admitted he'll miss talking to him....MORE

"Could commodity prices be in for a downdraft?"

Don't let today's broadly based up-move in the agricultural commodities lull you into dreams of bovine bliss.
The real indicator may be the energy complex where every component is down on the day.
From Humble Student of the Markets:

Several months ago Gluskin Sheff chief economist David Rosenberg pointed out that the Shanghai stock market appears to lead commodity prices by about four months.

Looking at the chart below, the Shanghai Composite broke down in mid-April. Fast forward four months to today and factor in yesterday's market action...MORE

Equity Risk Premium: "Why the market’s rate of return—and your nest egg—may never recover"

Rob Arnott has done quite a bit of work in this area, from a practitioners perspective.
If the conclusion is correct the implications for the public sector union pension plans are staggering.
From The Atlantic:

The Great Stock Myth

In 1985, Rajnish Mehra and Edward C. Prescott, economists then at Columbia University and the University of Minnesota, published a paper pointing out a strange anomaly they dubbed “the equity premium puzzle.” Since the late 19th century, stock investments in America had generated returns that were 6 percent higher than what economists call “the risk-free rate—the yield on an investment for which there is virtually no risk of losing your principal. The low-risk investments, such as short-term U.S. government debt, had yielded less than 1 percent.Those “excess” stock-market returns, which include both price appreciation and dividends, are much higher than you would expect if they simply reflected the risk of losing your investment (don’t even get me started on the arcane procedures by which economists arrived at this conclusion). Moreover, this premium cannot simply be attributed to an underestimation of future corporate growth by investors. Even when expected dividend or corporate-earnings growth is taken into account, stock returns are higher than one would predict. 

Mehra and Prescott’s paper coincided with the early stages of a long boom in equities that lasted from 1982 to 2000. In the years after its publication, people like Wharton’s Jeremy Siegel (and many less careful or measured imitators) wrote books touting the benefits of long-term stock investing. Americans jumped into the stock market, first tentatively, then eagerly, and finally almost hysterically. Convinced that equities offered an attractive risk-reward ratio, they began bidding up the price of stocks. Stock-price increases fueled expectations of further growth, until by 1999, a Securities Industry Association survey showed that investors expected to earn an annual rate of return of 30 percent. In other words, they expected that by 2010, stock prices would have skyrocketed.
Their actual return, of course, has mostly been negative. Over the past decade, equity investing hasn’t offered much of a premium. The market went up (the Dow hit another record high in the middle of the decade). But then it went down again. In finance terminology, we experienced a lot of volatility—the major indexes have fluctuated a lot—but not much real growth.

One possible explanation for this pattern is that the equity premium has eroded. Markets have grown more efficient over time, as more and better information—and the computer tools to analyze it—has become available. Meanwhile, the stock market has democratized. Modern diversified portfolios have reduced some of the risk of holding stocks, because even if a few companies fail, they won’t take your entire nest egg with them. Rather, the failures average out with the successes to produce a relatively steady rate of return. As defined-benefit plans—what your grandfather called a pension—have died off, people have poured their retirement savings into mutual funds that offer this sort of diversification. The deeper pool of money flowing into equity markets means that equities no longer need to offer a higher yield in order to attract money from bond and other securities markets.

The equity premium’s shrinkage may have another reason. Financial markets have an interesting feature that has undone many a trading strategy: once everyone starts believing something, it often stops being true. If you discover an arbitrage opportunity—otherwise known as a “price anomaly” or “free money”—it will be profitable only as long as few people know about it. Once it is widely known, bidders will rush into the market until the discrepancy is traded away. After that happens, future returns will be lower....MORE 

HT: peHUB

"Where Americans Are Spending More....Abd Where they've Cut Back"

From Mandel on Innovation and Growth:

Since the recession started in the fourth quarter of 2007, the common theme has been about Americans cutting back on their spending. But the latest numbers from the BEA show aggregate personal consumption expenditures are up 2.9%, or $285 billion.  So we must be spending more on something!
So here is a table of winners: Some goods and services which have shown an increase in spending since 2007IV.



Right there up at the top is America’s love affair with mobile devices, where spending has soared almost 17% since the recession started.  Also supporting my thesis of a communications boom–spending on wired, wireless, and cable services have risen by 5%.

In addition, Americans still care about their pets, their children, their hair, and their guns.

Of course, the data also shows a big gain in spending on education, healthcare, and housing, but it’s impossible to know how much of that increase is actually coming out of the pockets of households....MORE

HT: Carpe Diem

Cisco Downgraded at BMO Capital, Oppenheimer; Price Targets Cut at RBC, Deutsche, Piper, Wunderlich (CSCO)

The stock is down 9.7% at $21.43.
Tech Trader Daily has the roundup:

Cisco Systems (CSCO) shares are down about 9% following yesterday’s lackluster July quarter earnings report - and disappointing guidance for the October quarter.  CEO John Chambers talked extensively on the post-earnings call about the “unusually conservative” and “cautious” comments he has been hearing from customers in recent weeks; Cisco’s customers are worried about the the strength of the economic recovery. And now we all get to worry right along side them. At the same time, Cisco says it intends to continue to invest on its own business, and in fact has been hiring up a storm; while that’s good if you happen to be looking for a job, and can be viewed as a showed of confidence, to some on the Street it is going to look like they aren’t paying enough attention to costs at a time when the company is seeing pressure on gross margin from higher component costs.
There are still plenty of Cisco bulls around, but their number is down a bit from 24 hours ago. Here’s a sample of some of the Street’s commentary on the stock this morning:

• Tim Long, BMO Capital: He cuts his rating on the shares to Market Perform from Outperform, slashing his target to $23, from $32. “Cisco reported July quarter results that were roughly in line and provided slightly lower guidance for October,” he writes. “We are concerned that the macro uncertainty will weigh on revenues, and the stock, over the next few quarters. Gross margins have been weak owing to component shortages, but competition is also increasing and the mix is shifting. Management is continuing to add to headcount, which is risky given the mixed signals that it is getting from customers. So we have concerns on both the top and bottom lines.”
• Ittai Kidron, Oppenheimer: He downgrades the stock to Perform, from Outperform, and withdraws his old $32 target. “We’re concerned with management’s commentary suggesting a choppy and more gradual recovery with increasing [calendar 2010 second half] spending uncertainty from its large customers,” he writes. “Cisco’s margin decline (impacted by supply chain, mix and competition) also is a growing concern. These will likely weigh on the shares. We don’t expect the business environment will get worse, but at the same time we believe the economic and spending environment won’t get much better either. We believe the shares are likely range-bound and as such we find it appropriate to step to the sidelines until a clearer direction is established.”
• Mark Sue, RBC Capital: He maintains his Top Pick rating on the stock, but cuts his target to $28, from $33. “The outlook remains uncertain and a lack of specific news during August may point to a choppy tech tape, particularly as linearity becomes more of a focus,” he writes. “For long-term minded
  investors, we recommend Cisco in a balanced tech portfolio.”
• Brian Modoff, Deutsche Bank: Keeps his Buy rating, but cuts target to $28, from $32. “Management repeatedly pointed out that they are executing on all cylinders on things within their span of control – sales, new product launches, supply chain management, etc.,” he writes. “However, they sent clear signals that factors beyond their influence, i.e. macro conditions and business sentiment are adding incremental uncertainty to their customer spending patterns.”...MORE

"Cisco Comments: Mixed Signals, Recovery has slowed " and Why Won't the Customers Pay? (CSCO)

Uh oh.
I was going to go with some variant of  my "Stocks closed generally mournful and reflective." schtick but Chambers' message is a bit more serious than that. This is what Tech Trader Daily was referring to in the post below.
From Calculated Risk:

A few excerpts from the Cisco Conference call (ht Brian):
“... there are some challenges that are contributing to an unusual amount of conservatism and even caution. In short, we see the same opportunities and challenges that you are reading about in regards to the market, those challenges ranging from GDP growth and future GDP projections continuing to flow in the US, job creation challenges, and concerns coming out of Europe just to mention a few. We are seeing a large number of mixed signals in both the market and from our customers' expectations, and we think the words unusual uncertainty are an accurate description of what is occurring. The Federal Reserve's comments yesterday that the pace and output of the recovery has slowed in recent months and that the recovery is likely to be more modest in the near term then has been anticipated just a few months ago, are comments that most of our large customers that I have talked with recently would agree with. Also, the same customers would agree with few exceptions that they still expect a very gradual return to more normal economic conditions.”...MORE

From The Market Ticker:
CISCO: Anyone Remember LUCENT?

Uh, yeah.
From the conference call: "Days Sales Outstanding surge from 27 to 41 days."
Oh really Mr. Chambers?
Anyone remember these tickers?
Let's go to the "front" of the line:

The book cooking continues.  CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book.  Banks are still carrying HELOCs behind underwater firsts at or near PAR, even when the first is non-performing.  Those loans have a literal zero recovery value.  What could possibly go wrong with hiding asset quality (or lack thereof) off balance sheet where nobody can see it?  Nobody remembers Lucent?  Enron?  It wasn't THAT long ago.  Will it get CISCO or these banks?  I have no clue but this much I do know - nobody ever hides good news, they sing from the rafters.  You judge what's going on here.

Now add to this deterioration in customer pays and tell me what is coming.  Anyone remember Lucent and Winstar (which bought my company, incidentally, then blew sky high over, in no small part, their inability to pay Lucent.)

Winstar, if you recall, was the largest corporate bankruptcy in American history - until MCI blew up, that is.
But the story wasn't Winstar blowing up.  It was that Lucent was nearly bankrupted with all their "vendor held" financing, and ultimately was forced into a merger, with essentially all of their shareholder value destroyed.

All because they got cute with vendor financing in order to keep the Ponzi Scheme of "indefinite growth" going - and thought that the economy would continue to "be ok" or even "improve."
They were wrong, and got destroyed....MORE

UPDATED: "Cisco: Thanks For Nothing, John; More Pain For Tech Thursday?" Reactions and Notes from the Conference Call (CSCO)

That's Eric Savitz, probably the best reporter working Silicon Valley.
From Tech Trader Daily:

Well, that’s not at all what the Street wanted to hear from Cisco Systems (CSCO).

The company, which saw the last downturn in the tech sector long before most other companies were talking about it, today reported disappointing results for its fiscal fourth quarter ended July, and said some scary things about what it is hearing about customer attitudes about spending.

Revenue was a little light of expectations, but the trouble runs a lot deeper than that. In particular, the guidance for the October quarter was short of Street expectations. CEO John Chambers noted on the company’s conference call with the Street that it saw softening business in the mid-June to mid-July time period, but added that they strengthened after that. The company’s margins were short of expectations, due in part to higher component costs. Worst of all, Chambers reported that Cisco’s customers were showing unusual conservatism in their buying habits and outlook....MORE

Here's the updated part of Savitz' earlier post "Cisco Q4 About In Line; Revs $10.8B; Non-GAAP EPS 43 Cents; Q1 Rev Guidance Misses Ests; Stock Falls In Late Trade (Updated)":

...Update: CEO John Chambers said on the company’s post-report conference call that this was “a very strong quarter for Cisco.” They company had record revenue, toward the high end of guidance. Non-GAAP net income was also a record, up 36%. Revenue was $622,000 per employee. Book-to-bill was slightly above one.
Other items from the call:

• Cisco added 2,000 staff in the quarter not including acquisitions. Chambers says the company will continue to hire. Over 70% of the additions were in the U.S., and over 600 of those were in California.
• Geographic breakdown, based on orders: Overall, orders were up 23% from a year ago. Emerging markets up 35%; Europe was up in the mid-20s. Asia/Pacific and North American were up about 20%. Japan was flat. India and Switzerland were up over 50%. Canada, Brazil and Mexico grew 40% or better.
• On a customer segment basis: Public sector, enterprise were up 23-25%. Consumer was flat. Service provider was up in the high teens.
• Advanced technology revenue was up 27%, switching 27%, routing 15%. CRS family was up 20%, with $1.2 billion annualized running rate.
• Supplier lead times have come down but are still longer than they would like. Chambers said product lead times to customers are now within normal range.
• Chambers sees some challenges in terms of GDP growth, job growth, and demand in Europe. He says customers are showing “an unusual amount of conservatism and even caution.”...MORE

And yet another Cisco post "Cisco: Staffing Up; 3,000 Hires In 2 Qtrs, 3,000 More To Fill".

The guy is a machine. During earnings season I've seen him put up over twenty-five posts per day, original content with calls to analysts, etc. Just an awesome business journalist.

First they Came for the Investment Banks: "UBS Sued For Copying And Pasting"

Apologies to the literary estate of Pastor Niemöller.
From DealBreaker:

When you work for UBS, on any given day of the week, you know there are an endless amount of ways for your company to potentially embarrass itself. Obviously there’s the ‘lose, like, insane amounts of money’ route, in addition to the tax stuff– always good for a little egg on the face– but also lots of much more creative ways to get the job done that don’t take much man power.

For example, you could piss off a client so much that he makes good on his threat to chain a bull to the side of your building. Or, you could get shitfaced at a strip club and while being arrested for driving while under the influence (and carrying an unlicensed firearm), feel the need to tell the officer you’re a managing director at the Swiss bank. And so on and so forth. Alternatively, if you’re an unimaginative fuck but still want to do the brand proud, you could just go with a move de rigeur among lazy high school students.

UBS AG’s U.K. unit was sued for allegedly copying articles from oil and gas publications and reprinting them in the investment research it distributed to clients....MORE

Hey! I resemble that remark.
[as you copied and pasted DealBreaker -ed]

Cisco: Oops! The Tiniest Possible EPS Beat andTop Line Miss CSCO)

More to come.
After-hours the stock is down 5.4% at $22.45.