As a hard working college student at UC-Irvine, when I was done studying and my roommates and friends needed to get a well deserved break, we chose to frequent an establishment close to the campus called Big Boy's, which is now owned by the Frischs Restaurants Inc (AMEX:FRS), in case you were not aware (no, we don't own shares though I looked at it a few years ago). It is now big boy time in equity markets across the world as investors are not in as nearly a forgiving mentality as over the past five years. You see, with valuations on equities doubling, tripling, or even more in many cases, corporate results have to justify paying above average market multiples, or investors just lower the boom by selling indiscriminately. Of course, you could always invest in the bargain that is treasuries, yielding an out of sight 1.67% on the 10 year instrument. Lucky you, lot of value there.
With the growing realization the most pressing problem across the globe is deflation, especially with the joy of Europe giving it's daily dose of bad news, a 2.5% GDP print for the fourth quarter of 2014 certainly did not help your cause if you are long U.S. equities. You would think a 4.3% rise in consumer spending would help give pause to those who believe the end is neigh. Nope. Increasingly, the image of the lost decade in Japan is being thought of as the closest scenario to our current paradise here in the United States. There are dramatic differences between those two situations, but before we address that issue, lets talk about the previous week of earnings reports we had to digest.
The week started off with Caterpillar Inc (NYSE:CAT), Procter & Gamble Company (NSE:PROC), and Microsoft (NASDAQ:MSFT) earning boos and hisses for their misses. The first two were badly hurt by a strong dollar, while Microsoft still is dependent on its legacy businesses, especially revolving around PC demand. On Tuesday, Apple (NASDAQ:AAPL) destroyed it's projections with nearly 100 million units sold and 18 billion dollars of profit in three months. With nearly 180 billion dollars of cash, you could accurately say Apple shareholders are more flush than most sovereign nations, including the one we currently reside in. The past three days have seen tech titans Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and QUALCOMM (NASDAQ:QCOM), along with plenty of others, tell us how they are doing, why they will continue to thrive and potentially conquer the world, but certainly, not if Apple can help it. Alibaba showed why in Chinese it's profession is stealing from thieves (thanks to noted short seller Jim Chanos for that one) as you could say the same thing about it's report (it did not meet big expectations but the numbers were good).
Chevron (NYSE:CVX)and Shell (NYSE:RDSa) both disappointed the markets with upstream figures which were not as high as expected. In addition, they each cut their capital expenditure projections for 2015 with Chevron adding they have suspended the stock buyback. The big boys in Oil know how to retrench as they have been through the vicissitudes of supply and demand many times. Interestingly enough, the volatility in oil was again in evidence this week with a nearly 5% down day on Tuesday, followed by a huge bounce on Friday, up nearly 8%.
In the IPO market, Shake Shack went public at a valuation of over $1 billion. No comment on the value there, but it was nice to hear all employees and managers got to participate in the IPO, not just the investment banking syndicate and top management. There is much made about the growing disparity of income in the land, and one way to help address the issue is to have more participation and ownership in public entities by the guys on the front lines who make it happen in almost any company. If you combine that with addressing the egregious stock option issuance at nearly every public entity, well, maybe things would change. Yeah, right, fat chance on that one.
What has become most evident in digesting the figures of the numerous entities we own and follow is you have an all or nothing result for shareholders of public companies. There are a few companies who dominate their industries and they are rewarded for their superiority, probably too much so. If you own entities which are the second, third, or fourth competitor and your results are not outstanding, think 30% plus revenue growth and similar in profits as well, those who allocate capital just don't want to own your stock. As important, a group which does not perform gets punished, and severely. Look at McDonald's (NYSE:MCD), as a great example, where their board of directors decided to get rid of the CEO, Mr. Thompson. After 10 years of performance which yielded less than nothing, enough was enough and the powers that be pulled the plug. You can also add in the departure of a fifteen year veteran at Mattel after the numbers disappointed for a second straight year. And that, my friends, is the difference between markets in the United States and those in Japan.
Here in our competitive little corner of the world, results matter, and shareholders act on them. In fact, with the increasingly large sums of capital being raised by activists, time frames are very short for management teams which continue to disappoint. In addition, large institutional investors like pension funds have become increasingly outspoken about corporate governance issues, which include poor shareholder returns. Private equity groups also are far more willing to get rid of managers who are not delivering on the vision the PE owners want for a holding in their portfolio. Conversely, in Japan, there is very little pressure by shareholders to achieve returns for their owners. Some of this is related to interlocking holdings, and some may be because of culture. Still, the bottom line here in the states is the bottom line, and that ain't going to change any time soon. Yup, it is big boy time in the markets, and that isn't going to change either. Next week will again bring a ton of earnings reports, and you can bet we will be watching. Thank you for reading the blog this week.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.