Wall Street Bull-Ony and Other Random Monday Observations by Pete on the Street

February 12, 2018
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LA VERNE, California, Feb. 12, 2018 — Ready For Takeoff? Before thinking corporations have turned all soft, fuzzy and labor friendly, by announcing bonuses for their rank and file in the wake of the new tax bill, consider that the $1,000 bonus JetBlue Airways awarded to 21,000 employees amounts to less than a penny a share, pre-tax. It’s more likely that the tax-cut bonuses have been fueled by the need for employers to hold on to their valued workers at a time when the unemployment rate is low and unfilled job openings are high.

Opinions Are Cheap: A major factor contributing to the housing crash and near total collapse of the banking system in 2008-09 were the inflated and often fraudulent valuations assigned to houses. Rather than hiring licensed appraisers, many banks simply hired real estate agents who gave their value judgments, known as Broker Price Opinions or BPOs, of what they thought the properties were worth. After the financial meltdown, Congress banned the practice, but the prohibition doesn’t apply to investors buying tens of thousands of properties. Typically, a full appraisal runs about $500 and a BPO about $100. Reportedly, an Indian company will perform BPOs for $10 a house. Draw your own conclusions about building in protections to prevent 2008-09 happening all over.

Devilish Debt: The United States will spend more on interest payments than on the military by 2027, according to projects by the Congressional Budget Office.

No Room for Error: During and after the last three downturns, the Fed cut rates by 5.25 percentage points, 5.5 points and 4.75 points. But if we enter another downturn and rates are already so low that it’s impossible to cut rates as much as they have been cut in the past, that tool to get the country out of recession will have been dulled or even lost.

Nice Versus Vice: “Sustainable,” “responsible,” and “impact” funds continue to capture the attention of do-good investors, but does corporate social responsibility pay off for them? According to the Wall Street Journal, of about 175 “socially responsive” companies that had full-year returns in 2017, 75% underperformed the market. The paper’s conclusion, if you choose nice over vice, you’re likely to come out a loser. Profits, not good intentions, are the best benchmark of a company’s value to consumers and society.

Unintended Consequence: Before the new tax law went on the books, developers could take a 20% federal historic tax credit incurred on many rehab costs. That 20% payback still exists, but is now spread over five years instead of one, which developers, preservationists and bankers say reduces its value.

Follow The Money: William Bain, the eponymous founder and later chairman of Bain & Co., which mentored Mitt Romney, took an unusual path to get to the top. He majored in history and dreamed of becoming a teacher. But later he found digging for research boring, so after graduation he went to work for Vanderbilt’s development office, soliciting donations from wealthy alumni, including many CEOs. “I was fascinated by how they got there, what they did, how they thought about their jobs,” he told Walter Kiechel, author of “The Lords of Strategy.”

Clear Choice: I always like to ask the question, if you could pick only one stock of the following to hold for the next 10 years, which would it be: Alphabet (Google), Amazon, Apple, Facebook or Netflix. While you could make a strong case for each one, Amazon would be my clear choice. Not only does Amazon “own” retail and have a big presence in the cloud, there’s no telling how big their advertising revenues can grow. Right now, Amazon doesn’t break out ad revenues as a separate category. It’s supposed to do about $3 billion this year compared to Google’s $73 billion, but Amazon is coming on strong. Advertisers believe they have to be on Amazon’s pages despite the roughly 33% bite it takes from advertisers (15% of the selling price, another 5% to 6% to have Amazon warehouse and ship your product, and another 12% or so for an ad sold through an Amazon). According to the WSJ, every time Amazon racks up another percentage point of the $5 trillion U.S. retail pie, another $50 billion in the kind of data that Google and Facebook relied on disappears from their systems.

As Seen on RT: Broadcaster RT, not CBS or CNN, was the first news organization to surpass 1 billion views on YouTube. RT is the Russian state broadcaster.

How Far Will they Go?: Citing “widespread consumer abuses and other compliance breakdowns,” The Federal Reserve took the extraordinary action last week, capping Wells Fargo’s growth at $1.95 trillion, where it stood at the end of 2017. Not only was WF fined for opening accounts for customers without their authorization, the bank also admitted charging auto-loan customers for car insurance they did not need and mortgage borrowers erroneous fees . Until the bank can show that its practices have improved, the cap will stay in place.

Pouring It On: In January, investors poured $100 billion into equities (stocks), the biggest monthly inflow on record. One more sign the market was due for a correction?

Greed Is Good: Amazon’s quarterly profit topped $1 billion a quarter for the first time.

Not So Super: Just 51% of men aged 18 to 49 say they follow the NFL closely, down from 75% four years ago.

Tuning Out: iHeartMedia Inc, the nation’s largest radio broadcaster, could file for bankruptcy protection  as early as March. For five years, the company has spent more on debt than it earns.

The Feeling Isn’t Mutual: Four out of five mutual funds fail to match the performance of the market they invest in.

Alexa, How Much Did Amazon’s Market Value Increase Last Year?: 56%, beating all of its peers. By the way, Amazon CEO Jeff Bezos is the world’s wealthiest person.

The Original All-White Sox: Major League Baseball broke the color line with the Dodgers’ signing of Jackie Robinson, but the Boston Red Sox didn’t employ a black ballplayer until 1959, the 16th of 16 teams to do so.

Do What You Love: The private company held by travel mogul Rick Steves, the writer of 50 travel books and the guy you see globetrotting on PBS, produces $100 million in annual revenues and has 150 employees. After graduating from the University of Washington, he vowed to travel to Europe each year, and he has.

Bares Repeating: Edgar Degas painted scores of dancers and ballerinas. It wasn’t because he lacked imagination; it was because he pursued perfection: “Do it again and again, 10 times, a hundred times,’ he wrote to a friend. “Nothing in art must be seem to be an accident, not even movement.”

Shoot For A Million: Less than 0.1% of videos reach 1 million views in their first month, the magic number for YouTube posters to earn $900 in advertising revenue. Of the 100 most watched videos since YouTube has been a social media option, only four were not professionally produced music videos.

Chump Change: To throw a little light on the recent tax cut, driving the U.S. another $1.5 trillion in the hole, the government paid $33 billion to bail out Wall Street banks and auto companies under the Troubled Asset Relief Program (TARP) during last decade’s financial crisis. That now seems like chump change compared to the $1.5 trillion handout.

The Fault Lies Not in the Stars, But In Their Wallets: More than 5 million direct student loan borrowers have defaulted. To fall into this category, you went at least a year without making a payment.

Student Groan Mess: One of the reasons for seemingly limitless tuition hikes is the runaway student loan program. As long as students and their families could rely on an open spigot of federal student-lending programs, colleges and universities didn’t feel constrained by what they could charge for tuition. I personally know one University of La Verne student who owes more than $125,000 in student loans. Perhaps, limits should be placed on how much individuals can borrow, forcing universities to be more responsible stewards for the students they supposedly serve.

Pause for Concern: The new Fed chief Jerome Powell is a former PE (private equity) guy in charge of leveraged buyouts (financial instruments heavily financed by debt paid back by selling off assets and trimming workforces of target companies). He is the first non-economist to lead the Fed in 30 years. Is it more than a coincidence that the market suffered its largest single-day point drop on his first day in office?

Facebook’s Monetization Policy: Selling advertisements to your cat photo postings. At the end of 2017, 2.14 billion people were using Facebook at least once a month.

It’s Growth, Stupid: Google’s $26.1 billion of operating income last year is about 40% more than Amazon has earned in its entire existence. Yet, in the tech world, growth is more important than profits, which explains Amazon’s greater investment appeal among tech investors. Since 2010. Amazon’s larger revenue base has averaged 28% while Alphabet’s has averaged 21%.

Elder Kindergartners Produce Better Returns: According to a Wall Street Journal story on top-performing mutual fund managers, those who were among the oldest quarter of their kindergarten class outperformed those in the youngest quarter by an average of 0.48 percentage points a year. That would amount to about $4,800 a year if you were an investor with $1 million in a mutual fund. The reason for the difference is confidence, the study’s co-author Kevin Mullally said.

Can You Handle the Truth? Twice in the past 20 years — between 2000 and 2002, and again between 2007 and 2009–the stock market has cut investors’ wealth roughly in half. If a 6% daily drop, which occurred on Feb. 5, the day after Super Bowl LII, makes you squirm, then you probably have too much invested in stocks for your own psychological good.

Paradise Lost: Hawaii has 88,000 cesspools across its eight  major islands, most in the United States. Collectively, they deposit 53 million gallons of raw sewage into the ground every day. Sewage seeping into groundwaters is beginning to contaminate Hawaii’s drinking water while other untreated human waste is polluting Hawaii’s ocean waters, sickening swimmers, surfers and snorkelers. Estimated clean-up cost: $1.75 billion.

Not So Fabulous New Word: “Fabless” — it means you outsource the actual fabrication of your product for someone else to make.

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