In this newsletter we will explore the exciting thought that the US economy may once again be a bright economic light with respect to global growth.
A key sign of an improving American economy is a decline in food stamp usage. After the 2008 recession, rates of food stamp usage in the US soared. As of December 2012, a record 47.8 million Americans were on food stamps, or the Supplemental Nutrition Assistance Program (SNAP) as it is more formally called. SNAP allows users to buy basics, but not tobacco, pet food or alcohol. Since Dec 2012, the number of people on SNAP has declined by 1.6 million leaving 14.8% of the US population on SNAP. Prior to the 2008 recession, the share of the population on SNAP ranged from 8% to 11%. While the number of people on SNAP is declining it remains high relative to historical levels. Nonetheless, this decline in usage is a positive sign for the US economy. It suggests more Americans are employed, thus they no longer need or are eligible for assistance due to personal income growth.
The Institute for Supply Management (ISM) is predicting accelerating US manufacturing growth for the second half of the fiscal year. The ISM's Manufacturing Purchasing Managers Index was above 56 for each of the last 3 months, its highest sustained readings in over 3 years. A reading above 50 is considered positive as it indicates the manufacturing sector of the economy is expanding.
The Fed's quantitative easing program is almost complete. Although the Fed has re-committed to keeping interest rates low for the foreseeable future they are also hinting that the Fed Funds rate will begin to rise sometime next year. This has translated into a rise in US interest rates, which in turn has made US dollar investments more attractive for foreign capital.
Major US trading partners are not expected to raise interest rates in the near term as they are not seeing the same economic uplift that is currently taking place in the US. The net result is a significant rise in the US dollar versus most major currencies. For example, the US dollar has gained 5.0% versus the Canadian dollar over the recently completed quarter.
During the third quarter, the US stock market (as defined by the S&P 500) rose 0.6%. This translated into a 5.6% gain for the S&P 500 in Canadian dollars. The Canadian stock market declined by 1.2%, in part related to a less robust Canadian economic forecast. The decline in oil prices affected the 25% of the Canadian stock market index that is energy related. The Canadian bond market gained +1.1% as there was no material movements in Canadian interest rates.
So where does that leave us for the rest of the year and beyond? We have a US economy that continues to gain strength in a sluggish global economy. The Canadian economy's tepid performance will continue, with the Bank of Canada forecasting sub 2% growth for the next few years. The European economy is slowing and there are concerns about it slipping back into recession. Unemployment remains high in Europe. Unrest in Ukraine and slow growth are pushing the European Central Bank to consider additional stimulus. Recent tax changes led to the Japanese economy contracting over 7% in the second quarter. Japan continues to hope that its easy monetary policy will have a positive impact on economic growth.
Chinese economic growth has also slowed. Sluggish or non-existent GDP growth in their trading partner's economies is slowing Chinese exports. Their real estate sector is also undergoing a serious correction. Property prices have fallen 3.1% since April and housing sales have also declined 10.9% from the prior year. Unlike previous real estate sector corrections which were
triggered by government policy decisions, this downturn appears to be primarily related to a buyers “strike”. There is no quick and easy government policy to be reversed that would lead to a rebound in the real estate market.
GDP growth in China is forecasted to be at multi-year low, at 7% for 2014. With a number of structural issues, economic reform and an anti-corruption campaign it is possible that Chinese growth will not return to growth levels of greater than 8% any time soon. As the Chinese population ages and personal incomes rise, the Chinese economy may be approaching a point where historical heady growth numbers are no longer sustainable for prolonged periods of time.
What we are left with is a global economy where the US may once again become the prime economic growth engine. A bigger question is whether a rising US tide (US economy) will lift all boats (other global economies) or just benefit the US economy? We believe it is likely to be the latter, where the US stock market continues to rise, but not all companies benefit to the same proportion. It will be trickier for investors to keep pace with the stock market averages as there will be wider dispersion from individual stock returns. We have already begun to see an increase in stock volatility levels over the past quarter.
Current stock valuations are reasonable, but definitely not as cheap as they were a few years ago. Stocks will need earnings growth to sustain upward movements in stock prices. With variable economic conditions around the globe, we should expect more volatility in both individual stocks and the markets in general. Differences in economic fundamentals from one country to another have yet to register in stocks indices where monthly returns from one market to the next have remained similar. Global sector indexes show a similar trend. Within the S&P 500, dispersion between individual stock returns on a monthly basis is close to multi decade lows. Low stock volatility created an environment where fundamentals across markets, sectors and stocks are not correctly priced. Driving this tendency is a low interest rate and an easy money environment. Investors who would typically invest in high quality bonds have put a higher than normal proportion of their money into stocks. Not all investors are focused on the differences in individual stocks and markets. We anticipate a gradual increase in volatility, which was largely absent over the last year.
While markets may see increased volatility, we still believe that stocks remain the preferred investment vehicle relative to other asset classes. Stock markets (especially the US market) offers return potential that is in line with the historical averages (7 - 8%) and above the expected returns for bonds. We have been fairly consistent that stocks are a more attractive place to invest money, and we see nothing to change this outlook. We recognize that after a huge run for stocks from the bottom in 2009, bigger and more frequent corrections will probably be the norm. A diversified portfolio of stocks which is appropriately allocated should generate above market returns, while minimizing volatility relative to the market. Feel free to contact us so we can explain how best to achieve this.
Wednesday, October 15, 2014
Tuesday, July 22, 2014
Economic Growth Gaining Momentum
Strengthening global economic growth resulted in stock markets reaching record levels during the second quarter. The Canadian stock market rose 5.7% while the US market (as measured by the S&P 500) increased 4.7%. The S&P 500 in Canadian dollars only increased 1.3% as the US dollar gave back some of the gains from the prior six months The Canadian Bond market returned 2% as bond yields continued to decline.
The stock market has been unusually tranquil. Since the middle of April, the S&P 500 has not had a daily move greater than 1%. This lack of volatility also coincided with a decrease in trading activity. There is concern that the current investor complacency is a precursor to a stock market decline. We do not share these worries as we believe that a stronger economy is positive for stocks.
The US economy appears to have bounced back from a serious stumble in the first quarter. US Auto sales got off to a bumpy start in January and February due to severe winter weather across the Midwest and Northeast. Auto sales picked up in April, surged in May with the strength continuing into June. Low interest rates, a brighter economic outlook and pent up demand due to the US auto fleet’s advanced age are the primary drivers.
The stock market has been unusually tranquil. Since the middle of April, the S&P 500 has not had a daily move greater than 1%. This lack of volatility also coincided with a decrease in trading activity. There is concern that the current investor complacency is a precursor to a stock market decline. We do not share these worries as we believe that a stronger economy is positive for stocks.
The US economy appears to have bounced back from a serious stumble in the first quarter. US Auto sales got off to a bumpy start in January and February due to severe winter weather across the Midwest and Northeast. Auto sales picked up in April, surged in May with the strength continuing into June. Low interest rates, a brighter economic outlook and pent up demand due to the US auto fleet’s advanced age are the primary drivers.
The housing market also continues to improve. Existing home sales increased in both April and May. An increase in pending home sales in May is positive for home sales in June and July. Pending home sales is a leading indicator of future housing activity. Both new home starts and housing permits have also been trending up since the end of winter.
Consumer sentiment has been steadily improving. Better employment data has resulted in increasing personal incomes. Employed consumers are feeling increasingly confident that they will keep their jobs as the threat of layoffs has generally receded.
The majority of evidence supports current economic strength continuing through the rest of 2014. A sharp increase in bank loans highlights improved business confidence. A pick up in rail car loading's reflects a strong order book across a broad range of industries. The US ISM manufacturing report for June showed a large jump in new orders. The increased new order rate is confirmation that the US economy continues to improve. This data point could also imply that Durable Goods orders are also improving. Upside in Durable goods orders may signal that companies are finally starting to spend on capital expenditures. An upswing in capital expenditures has been an absent component of this economic recovery.
Since the 2008 recession, companies have under invested in capital expenditures. While capital expenditures can continue to be delayed, they cannot be postponed indefinitely. As CEO's increasingly focuses on growing their businesses, and fear of an economic downturn dissipates, companies will be more likely to invest for growth. Companies have been hesitant to invest their ample cash in their businesses opting instead to spend of it on stock buybacks and dividends.
The Canadian economy’s sluggish growth has resulted in a benign interest rate environment. The Bank of Canada has committed to keeping low interest rates for an extended period of time. We continue to believe that bonds will continue to provide low returns, especially relative to stocks. Bonds are only attractive from the viewpoint that they provide an element of stability to portfolios.
After the stock market's run over the last couple of years we still find stocks attractive. While current Price / Earnings (P/E) multiples are nothing to get excited about, stocks still offer potential returns that are in excess of those offered by bonds. Increasing Price /Earnings multiples have been a large contributor to stock performance over the last few years. While it is possible that multiples will continue their expansion, we put a higher probability that the P/E multiples will not rise from here. Stock price gains will come from an improving economy driving faster than expected corporate revenue and earnings growth. This will translate into lower P/E multiples and higher stock prices to reflect the better prospects for corporate America. While stock markets might continue to rise, not all stocks will benefit to the same magnitude. Call or email us on how you can best position your portfolio to take advantage of an improving economy.
Since our last note at the end of the first quarter, there has been relatively few stock market or economic surprises. The economy continues to improve, interest rates remain low and stocks are more attractive than bonds. We believe that this scenario should prevail for the remainder of 2014.
Monday, May 5, 2014
Wednesday, April 16, 2014
APRIL SHOWERS BRING MAY FLOWERS
The analogy may not be perfect, but "weather" is the best way to characterize the first quarter. With this winter being longer, colder and snowier than recent history, it is not surprising that weather did have a material impact on the North American economy. While some companies (notably retailers) frequently lean on adverse weather as an excuse for poor results, this is one quarter where the meteorological explanations are somewhat justified. The good news is that this economic rough patch will be followed by better times.
During the first quarter, cancelled air flights were at record levels. United Airlines alone cancelled four times as many flights in the first two months of the year as they did in the same period last year. In some parts of the country, construction crews lost over half their work days due to adverse weather conditions. The weather also played havoc with shipping schedules such that very little was arriving on time or with any sort of predictability. It is difficult to quantify lost productivity due to workers arriving late or their just staying home. Housing and car data was also less robust than last year. The inclement weather also impacted US regions that are typically insulated from winter, such as the South and Mid-Atlantic. Overall, investors were willing to accept management’s weather excuses at face value and thus maintained a positive attitude.
When companies report earnings in April, investors are likely to give them a "mulligan" or "pass" for sub-par results. Investors will overlook Q1 results in anticipation of better numbers for the rest of the year. US GDP growth estimates are starting to inch up closer to 3%.
A significant portion of the weather related economic activity that did not occur in the first quarter is not gone forever but just postponed. We anticipate that consumers who delayed major purchases, such as cars or homes, will for the most part proceed with these decisions. On a similar vein, consumers who stayed home to avoid the winter weather will purchase preplanned items in the electronic and clothing sectors. The same does not hold true for all expenditures as can be seen from restaurant visits. For example, if you did not go out for dinner in February due to weather, you are unlikely to make up for it by going out for dinner in a future month.
While weather remains an unpredictable element, demographics is more of a predictable quantity. Based on historical birth statistics, we can make reasonable predictions for future population numbers in various age groups. This is useful from an investing perspective due to its implications on economic growth. The future growth projections of the 30-39 age group are for a progressive rise over the next couple decades. The growth in this age group growth will have a long term positive impact on the economy and the stock market.
People in their thirties typically increase their spending levels more than any other age cohort relative to the prior decade of their lives. This is due to significant lifestyle changes experienced by this age group. This age group is more likely to get married and have children. These activities results in spending growth on houses, cars and all things kid related. As consumer spending accounts for 2/3 of economic activity, any sustainable increase in consumer spending is positive for the economy and the stock market. What's interesting about the chart is the contraction in the US population in this age group over the last fifteen years (due to the baby bust) and the corresponding sideways move in the market.
When companies report earnings in April, investors are likely to give them a "mulligan" or "pass" for sub-par results. Investors will overlook Q1 results in anticipation of better numbers for the rest of the year. US GDP growth estimates are starting to inch up closer to 3%.
A significant portion of the weather related economic activity that did not occur in the first quarter is not gone forever but just postponed. We anticipate that consumers who delayed major purchases, such as cars or homes, will for the most part proceed with these decisions. On a similar vein, consumers who stayed home to avoid the winter weather will purchase preplanned items in the electronic and clothing sectors. The same does not hold true for all expenditures as can be seen from restaurant visits. For example, if you did not go out for dinner in February due to weather, you are unlikely to make up for it by going out for dinner in a future month.
While weather remains an unpredictable element, demographics is more of a predictable quantity. Based on historical birth statistics, we can make reasonable predictions for future population numbers in various age groups. This is useful from an investing perspective due to its implications on economic growth. The future growth projections of the 30-39 age group are for a progressive rise over the next couple decades. The growth in this age group growth will have a long term positive impact on the economy and the stock market.
People in their thirties typically increase their spending levels more than any other age cohort relative to the prior decade of their lives. This is due to significant lifestyle changes experienced by this age group. This age group is more likely to get married and have children. These activities results in spending growth on houses, cars and all things kid related. As consumer spending accounts for 2/3 of economic activity, any sustainable increase in consumer spending is positive for the economy and the stock market. What's interesting about the chart is the contraction in the US population in this age group over the last fifteen years (due to the baby bust) and the corresponding sideways move in the market.
CHART 1: US POPULATION AGES 30—39 vs. S&P 500
Source: BMO Investment Strategy Group, Bloomberg, Census Bureau
Due to the recession and higher than normal unemployment rates for young people, household formations (marriages, people moving out of their parents homes etc) was below what it should have been. This pent up demand has potential to further boost housing and the economy over the next few years as housing demand moves closer to the long term trend.
Housing prices and home sales have rebounded sharply since the recession, but there still exists more upside. Chart 2 shows housing starts for the last twenty five years. Housing starts averaged 1.0 – 1.2 million per year pre-recession (ignoring the immediate lead up to the recession) versus four to eight hundred thousand since the end of the recession. New residential building activity has the potential to continue to increase without the risk overbuilding. Any increase in building activity would be incrementally positive for the economy.
CHART 2: US NEW RESIDENTIAL HOUSING STARTS
Source: Datastream
Assuming current economic forecasts of 2 – 3% growth are realistic, bond returns will approximate the current coupon rate of 2 – 4%. If the economy accelerates, interest rates will rise and bond returns will be less than 2 – 4%. The magnitude of the shortfall will be dependent on the strength of economic growth versus current expectations. The sluggish Q1 economy was primarily related to an unusually challenging winter. We believe that the economic rebound will continue and strengthen as it makes up for lost activity related to the large number of winter storms.
Based on the low single digit return potential for bonds, our preferred investment is in stocks. Stocks are reasonably valued and are poised to benefit from increasing economic momentum. Stocks are offering high single digit to low double digit (8-10%) returns based on current earnings estimates. Condor Asset Management has successfully positioned our client portfolios to take advantage of the opportunities in the stock market. If the economy accelerates as we expect it will, revenues and earnings will come in higher than current forecasts.
Friday, April 4, 2014
CANADIAN FAMILY OFFICES FACE STIFF COMPETITION
Family offices in Canada are a rarity, given the iron grip Bay Street exerts over the wealth management industry. Independent wealth managers are themselves becoming an endangered species.
Mutli-family offices are even rarer, numbering perhaps five or six.
“In Canada, that industry, that segment, doesn’t really exist,” said Arthur Salzer, CEO and chief investment officer of Northland Wealth Management, which has $300 million in assets under management. “Basically there’s ourselves and a couple of other providers and that’s really the extent of things. So we’re a bit of an anomaly in Canada from that perspective.”
In the United States, a segment of the RIA space operates as multi-family office, and many of them typically originate from a single family office, a family that created significant liquid financial wealth and is not only looking to manage it but also to manage the family and the family dynamics around it. Not so in Canada.
“To a large degree, either through their private banking or through their brokerages, Canadians in general deal with something with a name bank behind it and the independent space is very tiny,” Salzer said. “Most providers that call themselves wealth managers tend to be working at broker dealers that are owned generally by the Canadian banks, and they tend not to work as a fiduciary, which an RIA would or a multi-family office would, but really as a salesperson.”
Independent wealth managers can provide unbiased advice, noted Stephen Kahn, CEO of Condor Asset Management, which has assets under management of $15 million. “There is another subset of people are not 100% comfortable with the banks because of the inherent conflicts of interest,” he said. “They’re not always looking out for the clients the way maybe an independent will. You can get lost in a large organization, whereas if you go with an independent, typically, they are not as large, and your account manager is not going to change every 4 or 5 years. It is more of a longer-term relationship.”
A multi-family office typically begins its life as a single family office which then decides to offer its services to additional clientele that are not family members. For example, a single-family office that serves large and extended families may serve someone who is a 5th cousin.
“In this regards you are related, but not quite,” Salzer said. “It’s not a large step to extend the family office offering to someone who may be your neighbor. “The advantage is that these non-family clients may now have access to additional asset classes, managers or investments that a family offices typically can.”
The impetus behind Salzer forming his company was a family that he was serving took its company public in 2003, and as a result its financial assets became significant.
“Once that happened, things became much more complex because you end up investing in both direct and through private equity funds, hedge funds, farmland and real estate,” he said. “Large amounts of financial wealth act as an amplifier, so you need to have a firm that spends as much time on the intrinsic wealth of the family as the actual investments. We enable families to live the way they want to and do it in an intelligent fashion.”
Salzer views himself as a consigliere. “We’re the family member that’s not a family member,” he said. “If you take the illegalities out of the Mafia and you look at the family basis, then they were families that stuck together for generations. You get rid of the bad part and there’s something very good going on.”
Monday, January 27, 2014
Condor in the News - Commentary on EBAY
EBay Bets PayPal In-House Beats Pop From Icahn Plan: Real M&A
2014-01-24 21:26:02.824 GMT
(For a Real M&A column news alert: SALT REALMNA.)
By Brooke Sutherland, Brian Womack and Tara Lachapelle
Jan. 24 (Bloomberg) -- EBay Inc. is willing to forgo a
possible 26 percent stock pop by rejecting Carl Icahn’s proposal
to split off PayPal, banking instead on the promise of longer-
term rewards by keeping its online payment unit in-house.
Shareholders including Sterling Capital Management LLC and
Kornitzer Capital Management Inc. are, so far, backing the
stance of Chief Executive Officer John Donahoe, who says that a
unified EBay helps fund PayPal’s expansion. Activist investor
Icahn called a separation of PayPal, one of EBay’s fastest-
growing businesses, a “no-brainer” that would improve value.
While EBay’s breakup value is pegged by analysts and
investors at about $69 a share, compared with $54.94 yesterday,
investor Condor Asset Management Inc. said the stock will rise
as it expands PayPal to more vendors. Sharing risk management
and transaction data helps the $71 billion company’s online
marketplace and payment units better compete against rivals such
as Amazon.com Inc. and payment processor Square Inc., said
Susquehanna International Group LLP.
“We can all come up with a higher number than $55 for EBay
shares, but that’s why we own it,” George Shipp, a fund manager
at Sterling Capital, which oversees more than $45 billion, said
in phone interview from Virginia Beach, Virginia. “I don’t know
that it’s such a significantly higher number that it means the
EBay team is doing a lousy job, or that I have a burning desire
to light a fire under the board for some sort of short-term pop.
This is not a broken company.”
Icahn Stake
EBay, whose online marketplace sells everything from
motorcycles to golf clubs via auctions and at fixed prices,
acquired PayPal in 2002 to add online-payment services. The unit
almost tripled sales in the five years ended in 2012 and now
accounts for about 40 percent of revenue at the San Jose,
California-based company.
Icahn, who took a 0.82 percent stake in EBay and is also
seeking two board seats for his employees Jonathan Christodoro
and Daniel Ninivaggi, said this week that the company “hasn’t
done as well as it should have” and spinning off PayPal would
unlock value for investors. Icahn didn’t respond yesterday to a
request for further comment.
“We have been successful exactly because PayPal and EBay
are together,” Donahoe said during an earnings call with
analysts this week. “No other payments competitor has achieved
PayPal’s success, because no other competitor has a commerce
platform like EBay.”
Amanda Miller, a spokeswoman for EBay, declined to comment
yesterday.
Better Together?
Sum-of-the-parts estimates from six EBay analysts and
shareholders ranged from $60 to $75 a share. That tops EBay’s
record high of $58.89 in December 2004, and it implies the
company should be valued as much as 37 percent more than its
closing price yesterday.
Since EBay disclosed Icahn’s stake and also reported
holiday quarter sales that missed analysts’ estimates, the
company’s shares have gained less than 1 percent.
Today, EBay fell 1 percent to $54.37.
Even though a split may deliver returns for shareholders,
PayPal is in a better position to grow as part of the combined
company, said Stephen Kahn, a Toronto-based fund manager at
Condor Asset Management.
As EBay seeks to increase PayPal’s use by other vendors,
both online and in stores, “staying together is not a bad
thing,” Kahn said in a phone interview. “Until PayPal payments
broaden significantly beyond EBay e-commerce, I think it makes
sense.”
2014-01-24 21:26:02.824 GMT
(For a Real M&A column news alert: SALT REALMNA
By Brooke Sutherland, Brian Womack and Tara Lachapelle
Jan. 24 (Bloomberg) -- EBay Inc. is willing to forgo a
possible 26 percent stock pop by rejecting Carl Icahn’s proposal
to split off PayPal, banking instead on the promise of longer-
term rewards by keeping its online payment unit in-house.
Shareholders including Sterling Capital Management LLC and
Kornitzer Capital Management Inc. are, so far, backing the
stance of Chief Executive Officer John Donahoe, who says that a
unified EBay helps fund PayPal’s expansion. Activist investor
Icahn called a separation of PayPal, one of EBay’s fastest-
growing businesses, a “no-brainer” that would improve value.
While EBay’s breakup value is pegged by analysts and
investors at about $69 a share, compared with $54.94 yesterday,
investor Condor Asset Management Inc. said the stock will rise
as it expands PayPal to more vendors. Sharing risk management
and transaction data helps the $71 billion company’s online
marketplace and payment units better compete against rivals such
as Amazon.com Inc. and payment processor Square Inc., said
Susquehanna International Group LLP.
“We can all come up with a higher number than $55 for EBay
shares, but that’s why we own it,” George Shipp, a fund manager
at Sterling Capital, which oversees more than $45 billion, said
in phone interview from Virginia Beach, Virginia. “I don’t know
that it’s such a significantly higher number that it means the
EBay team is doing a lousy job, or that I have a burning desire
to light a fire under the board for some sort of short-term pop.
This is not a broken company.”
Icahn Stake
EBay, whose online marketplace sells everything from
motorcycles to golf clubs via auctions and at fixed prices,
acquired PayPal in 2002 to add online-payment services. The unit
almost tripled sales in the five years ended in 2012 and now
accounts for about 40 percent of revenue at the San Jose,
California-based company.
Icahn, who took a 0.82 percent stake in EBay and is also
seeking two board seats for his employees Jonathan Christodoro
and Daniel Ninivaggi, said this week that the company “hasn’t
done as well as it should have” and spinning off PayPal would
unlock value for investors. Icahn didn’t respond yesterday to a
request for further comment.
“We have been successful exactly because PayPal and EBay
are together,” Donahoe said during an earnings call with
analysts this week. “No other payments competitor has achieved
PayPal’s success, because no other competitor has a commerce
platform like EBay.”
Amanda Miller, a spokeswoman for EBay, declined to comment
yesterday.
Better Together?
Sum-of-the-parts estimates from six EBay analysts and
shareholders ranged from $60 to $75 a share. That tops EBay’s
record high of $58.89 in December 2004, and it implies the
company should be valued as much as 37 percent more than its
closing price yesterday.
Since EBay disclosed Icahn’s stake and also reported
holiday quarter sales that missed analysts’ estimates, the
company’s shares have gained less than 1 percent.
Today, EBay fell 1 percent to $54.37.
Even though a split may deliver returns for shareholders,
PayPal is in a better position to grow as part of the combined
company, said Stephen Kahn, a Toronto-based fund manager at
Condor Asset Management.
As EBay seeks to increase PayPal’s use by other vendors,
both online and in stores, “staying together is not a bad
thing,” Kahn said in a phone interview. “Until PayPal payments
broaden significantly beyond EBay e-commerce, I think it makes
sense.”
Funding Expansion
EBay can use the free cash flow from its marketplaces
business to fund the expansion and innovation, Matt Nemer, a San
Francisco-based analyst at Wells Fargo & Co., wrote in a report
yesterday. Having PayPal integrated with EBay’s marketplace also
helps build the payment service’s customer base, said Josh West,
an analyst for Kornitzer in Shawnee Mission, Kansas.
EBay’s marketplace makes up about one-third of PayPal’s
revenue and more than half of its profits, according to CEO
Donahoe. EBay also contributes more than 30 percent of PayPal’s
new customers.
“PayPal definitely benefits from being a part of EBay, and
the distractions around trying to spin off part of it or the
whole thing could certainly hinder its long-term growth
prospects” said West, whose firm advises the Buffalo Funds,
which oversee about $8 billion including EBay shares.
Sharing data between the services makes both the e-commerce
and online-payment businesses more competitive, Susquehanna
analysts Brian Nowak and James Friedman wrote in a report
yesterday.
Nothing New
Icahn isn’t telling shareholders anything new by
highlighting the potential benefit of a PayPal split, said Shipp
of Sterling Capital. Even so, Shipp said he prefers the long-
term rewards of keeping the company together to the short-term
boost that a breakup might bring.
“PayPal could trade at a higher multiple -- we know
this,” Shipp said. “There may come a day when it makes sense,
but I don’t know that we’re close to that day. It looks to me
like the integrated company is doing well.”
While there are some advantages to keeping EBay and PayPal
together, the manager of shareholder Jacob Internet Fund said
the case for splitting up is stronger. Retailers that may be
hesitant to use PayPal because it’s owned by their competitor
could choose to adopt the service if PayPal were independent,
Ryan Jacob said in a phone interview.
Win Faster
Investors will eventually give EBay credit for the value of
PayPal, though a breakup would accelerate that, said Daniel
Johnson, a Louisville, Kentucky-based money manager at River
Road Asset Management LLC, which oversees about $10.3 billion,
including EBay shares.
“We think we can win if it stays together, but we can win
a little faster if it gets split up,” Johnson said in a phone
interview.
Even if Icahn fails to spur a transaction, the added
pressure on EBay’s leadership benefits shareholders, according
to Sean Sun, an analyst at Santa Fe, New Mexico-based Thornburg
Investment Management Inc., which oversees $94 billion including
EBay shares.
"Having this activism is good because it probably gets
management more focused and brings to light the fact that the
company is undervalued,” Sun said in a phone interview. “I
don’t think the spin is going to happen without management’s
support, but just having Icahn in there can get them thinking.”
For Related News and Information:
Icahn at EBay Shows Boards Learning to Listen to Activists
NSN MZV5B76KLVR6
EBay Says Icahn Proposes PayPal Spinoff After Taking Stake
NSN MZV1QO6KLVSU
PayPal Increases Mobile Investment as Smartphones Replace Cash
NSN MXL7666S972A
EBay deal news: EBAY US TCNI MNA
Real M&A Columns: NI REALMNA
Top deal news: DTOP
--With assistance from Beth Mellor in New York. Editors: Beth
Williams, Sarah Rabil
http://www.bloomberg.com/news/2014-01-24/ebay-bets-paypal-in-house-beats-icahn-s-plan-real-m-a.html
EBay can use the free cash flow from its marketplaces
business to fund the expansion and innovation, Matt Nemer, a San
Francisco-based analyst at Wells Fargo & Co., wrote in a report
yesterday. Having PayPal integrated with EBay’s marketplace also
helps build the payment service’s customer base, said Josh West,
an analyst for Kornitzer in Shawnee Mission, Kansas.
EBay’s marketplace makes up about one-third of PayPal’s
revenue and more than half of its profits, according to CEO
Donahoe. EBay also contributes more than 30 percent of PayPal’s
new customers.
“PayPal definitely benefits from being a part of EBay, and
the distractions around trying to spin off part of it or the
whole thing could certainly hinder its long-term growth
prospects” said West, whose firm advises the Buffalo Funds,
which oversee about $8 billion including EBay shares.
Sharing data between the services makes both the e-commerce
and online-payment businesses more competitive, Susquehanna
analysts Brian Nowak and James Friedman wrote in a report
yesterday.
Nothing New
Icahn isn’t telling shareholders anything new by
highlighting the potential benefit of a PayPal split, said Shipp
of Sterling Capital. Even so, Shipp said he prefers the long-
term rewards of keeping the company together to the short-term
boost that a breakup might bring.
“PayPal could trade at a higher multiple -- we know
this,” Shipp said. “There may come a day when it makes sense,
but I don’t know that we’re close to that day. It looks to me
like the integrated company is doing well.”
While there are some advantages to keeping EBay and PayPal
together, the manager of shareholder Jacob Internet Fund said
the case for splitting up is stronger. Retailers that may be
hesitant to use PayPal because it’s owned by their competitor
could choose to adopt the service if PayPal were independent,
Ryan Jacob said in a phone interview.
Win Faster
Investors will eventually give EBay credit for the value of
PayPal, though a breakup would accelerate that, said Daniel
Johnson, a Louisville, Kentucky-based money manager at River
Road Asset Management LLC, which oversees about $10.3 billion,
including EBay shares.
“We think we can win if it stays together, but we can win
a little faster if it gets split up,” Johnson said in a phone
interview.
Even if Icahn fails to spur a transaction, the added
pressure on EBay’s leadership benefits shareholders, according
to Sean Sun, an analyst at Santa Fe, New Mexico-based Thornburg
Investment Management Inc., which oversees $94 billion including
EBay shares.
"Having this activism is good because it probably gets
management more focused and brings to light the fact that the
company is undervalued,” Sun said in a phone interview. “I
don’t think the spin is going to happen without management’s
support, but just having Icahn in there can get them thinking.”
For Related News and Information:
Icahn at EBay Shows Boards Learning to Listen to Activists
NSN MZV5B76KLVR6
EBay Says Icahn Proposes PayPal Spinoff After Taking Stake
NSN MZV1QO6KLVSU
PayPal Increases Mobile Investment as Smartphones Replace Cash
NSN MXL7666S972A
EBay deal news: EBAY US TCNI MNA
Real M&A Columns: NI REALMNA
Top deal news: DTOP
--With assistance from Beth Mellor in New York. Editors: Beth
Williams, Sarah Rabil
http://www.bloomberg.com/news/2014-01-24/ebay-bets-paypal-in-house-beats-icahn-s-plan-real-m-a.html
Monday, January 13, 2014
US $ Strength to persist vs. CDN $
The US Dollar gained 7.2% over the Canadian Dollar during 2013. The Canadian Dollar weakness is a function of both a strong US Dollar and a weakening Canadian Dollar.
When the Chinese economy was growing in excess of 10%, it was buying commodities in record quantities. This translated into currency strength in commodity oriented economies such as Canada, Australia and New Zealand. As growth in the Chinese economy slowed, their purchases of resources declined. This resulted in declining Commodity prices, along with the resource based economies currencies.
The US economic recovery is slowly gathering steam. Rates in the US have already moved up and the bias is clearly to the upside. With Canadian economic growth slowing, interest rates in Canada are unlikely to rise as quickly as in the US. Higher yields on US assets make holding or buying the US Dollar a more attractive proposition for investors. Money on the margin migrates to where it can earn the highest risk adjusted return.
The US Dollar has been and remains the world's reserve currency. None of the events over the last six years has changed this. If anything, events have transpired to solidify the US Dollars position as the global reserve currency. This is especially true as it becomes increasingly evident that there is currently no credible alternative. Part of the reserve currency's functions is to provide stability for global investors. Post the financial crisis, governments around the world mandated that their banks invest in safer and more liquid bonds. US government bonds, and the highest grade US corporate debt fit this better than non-investment grade or illiquid foreign bonds. The US bond market is deep, providing ample liquidity for investors to get in and out of at a moment's notice.
Many countries around the world are incentivized to depress their currency to ensure the competitiveness of their export oriented industries. This is accomplished by countries selling the local currency and buying the US Dollar. This results in upward movement of the US Dollar which translates into a lower Canadian Dollar.
When the Chinese economy was growing in excess of 10%, it was buying commodities in record quantities. This translated into currency strength in commodity oriented economies such as Canada, Australia and New Zealand. As growth in the Chinese economy slowed, their purchases of resources declined. This resulted in declining Commodity prices, along with the resource based economies currencies.
The US economic recovery is slowly gathering steam. Rates in the US have already moved up and the bias is clearly to the upside. With Canadian economic growth slowing, interest rates in Canada are unlikely to rise as quickly as in the US. Higher yields on US assets make holding or buying the US Dollar a more attractive proposition for investors. Money on the margin migrates to where it can earn the highest risk adjusted return.
The US Dollar has been and remains the world's reserve currency. None of the events over the last six years has changed this. If anything, events have transpired to solidify the US Dollars position as the global reserve currency. This is especially true as it becomes increasingly evident that there is currently no credible alternative. Part of the reserve currency's functions is to provide stability for global investors. Post the financial crisis, governments around the world mandated that their banks invest in safer and more liquid bonds. US government bonds, and the highest grade US corporate debt fit this better than non-investment grade or illiquid foreign bonds. The US bond market is deep, providing ample liquidity for investors to get in and out of at a moment's notice.
Many countries around the world are incentivized to depress their currency to ensure the competitiveness of their export oriented industries. This is accomplished by countries selling the local currency and buying the US Dollar. This results in upward movement of the US Dollar which translates into a lower Canadian Dollar.
Q4 AND 2013 IN REVIEW
Condor Asset Management is celebrating our fourth anniversary. We have consistently matched or outperformed comparable stock indices. Over the last year we also achieved stock returns in excess of 30% while maintaining our commitment to solid conservative investment profiles, as per the request of the majority of our clients. We are proud of our track record and appreciate the trust our clients have placed in us.
Over the last 3 months North American equity markets continued their winning ways. The S&P/TSX index gained 6.5% and the S&P 500 increased 9.9%. The full year was even better with the S&P /TSX gaining 9.4% and the S&P 500 increasing 29.6%. When factoring in the movement of the US Dollar relative to the Canadian Dollar, the US market provided Canadian investors with a gain of 38.9%. Contrary to some predictions, US Dollar strength relative to most major currencies persisted throughout 2013. We see few near term reasons why the Canadian Dollar will recoup these losses (vs. the US $). See our next blog entry.
Positive economic data is a catalyst for the upward movement of the stock market. The final revision to third quarter US GDP growth was +4.1%, partially boosted by an inventory build. Businesses typically build inventory when perceptions regarding the economy are positive. The employment data also highlighted a growing economy. Jobless claims dipped below 300,000 while November non-farm payrolls increased by 202,000. The unemployment rate declined to 7%, which is The Fed’s originally stated target for reducing the quantitative easing program. One of the bright spots was auto sales hitting levels which have not been seen since the financial crisis of 2008. Another highlight was the ISM (Institute of Supply Management) survey which yielded positive results of greater than 50% (which signify expanding demand). The ISM manufacturing survey was 57.0% while the comparable data for services was 53.9%.
This abundance of positive economic data has resulted in rising interest rates. Investor anticipation of a taper announcement pushed US bond rates to 3%. At the conclusion of The Fed's Open Market Committee meeting in December, The Fed announced that they would reduce bond purchases by $10 Billion a month starting in January. They further stated that depending on the data, they would continue reducing purchases throughout 2014.
Canadian bond returns during the past year were -1.2%. This is only the third year of negative bond returns since 1979. Bond returns over the last two years were a miniscule +1.2%. With current rates being as low as they are, rate increases will likely result in bond returns similar to the last two years. We currently prefer short term bonds so our clients are positioned to take advantage of potential reinvestment opportunities presented by higher interest rates.
We do not subscribe to the theory that rising interest rates will be negative for stock markets. An increasing interest rate environment accompanied by a growing economy is typically positive for stock markets. These conditions are currently present in the US and to a lesser degree in Canada. The US economy is forecasted to grow 2.5% - 3.0% in 2014, with Canada facing more modest growth of 2.0% - 2.5%. Both growth forecasts are an acceleration from the 2013 GDP growth rates. The US stock market surged with the Feds announcement of its reduced bond purchases. The Fed also surprised the market by promising to keep interest rates at current low levels for "an extended period of time". While this appears to be positive in the short term for financial markets, an accelerating US economy will probably make this a short lived promise.
There has been a fair amount of discussion concerning the potential of a stock market crash. We believe this is unlikely to occur. The crash argument hinges on the stock market being in an asset bubble created by low interest rates. It is extremely rare that so many pundits correctly call a bubble in a timely manner. When looking at the fundamentals compared to prior bull markets, stocks are not overvalued. Stocks on average trade at 15 times earnings, which is close to the historical average (Chart 1). Stocks are neither historically expensive nor cheap. With 8% earnings growth forecasted for 2014 (and 2015), there is still upside embedded in individual stocks.
Our discussion up to this point has been predicated on a reasonable US GDP growth rate. To date, growth has been somewhat tepid. Having said that, all the variables are in place so that 2014 might be the year where growth accelerates above 3%. Contributors to this would be improved employment rates, a better than expected housing recovery, growth in auto sales and the wealth effect.
2013 US GDP growth was depressed by approximately 2% in part due to higher taxes and reduced government spending. This follows two years of fiscal spending dragging down growth by about 1% per year (light blue line in Chart 2). US Government spending has been declining since 2009, while private sector GDP has grown at a 3.3% pace during the same period. Most of this fiscal spending handicap will disappear in 2014. State and local governments are beginning to invest in long delayed infrastructure projects. The Federal government recently passed a two year budget with less severe spending cuts than originally planned. The budget deal also reduces uncertainty by lowering the risk of a government shutdown due to legislative dysfunction. This is positive for the stock market, as investors dislike uncertainty and try to avoid. With government spending not impeding GDP growth, the US economy has potential to grow at something closer to 3.5% in 2014.
The wealth effect may also lend some support to accelerating growth in 2014. The consumer has been deleveraging (by increasing their savings rate) over the last few years in order to reduce debt levels. This growth impediment was necessary to repair the damage from the financial crisis. Consumer’s financial balance sheets have significantly improved. Less consumer debt combined with low interest rates have resulted in the household debt servicing ratio (Chart 3) currently being at the lowest level in 30 years. The lower income necessary to service household debt suggests that consumers will have more money available to spend.
Bull markets typically do not end unless there is a recession. Based on the abundance of positive economic indicators, a recession is not in our near term forecasts. If anything, we see an economy that is slowly gaining momentum. The biggest surprise for 2014 could be an economy that returns to normal. We define a normal economy as one that has a healthy employment market, buoyant housing and auto sectors and no fiscal drag from government spending. This would increase the probability the economy would grow in excess of 3%, which is has not done since before the recession.
Stocks are currently more attractive than bonds. While bonds are an important part of a diversified portfolio, their returns will be below historical levels. We see positive returns for both the US and Canadian stock markets but not to the same degree as 2013. Going forward, stock selection and being in the right sectors will be an increasingly important part of generating above average returns. Condor Asset Management has demonstrated that we can navigate the market risks and provide superior returns. Please contact us at Condor to see how we can aid you in designing a portfolio to help you achieve your financial goals.
Over the last 3 months North American equity markets continued their winning ways. The S&P/TSX index gained 6.5% and the S&P 500 increased 9.9%. The full year was even better with the S&P /TSX gaining 9.4% and the S&P 500 increasing 29.6%. When factoring in the movement of the US Dollar relative to the Canadian Dollar, the US market provided Canadian investors with a gain of 38.9%. Contrary to some predictions, US Dollar strength relative to most major currencies persisted throughout 2013. We see few near term reasons why the Canadian Dollar will recoup these losses (vs. the US $). See our next blog entry.
Positive economic data is a catalyst for the upward movement of the stock market. The final revision to third quarter US GDP growth was +4.1%, partially boosted by an inventory build. Businesses typically build inventory when perceptions regarding the economy are positive. The employment data also highlighted a growing economy. Jobless claims dipped below 300,000 while November non-farm payrolls increased by 202,000. The unemployment rate declined to 7%, which is The Fed’s originally stated target for reducing the quantitative easing program. One of the bright spots was auto sales hitting levels which have not been seen since the financial crisis of 2008. Another highlight was the ISM (Institute of Supply Management) survey which yielded positive results of greater than 50% (which signify expanding demand). The ISM manufacturing survey was 57.0% while the comparable data for services was 53.9%.
This abundance of positive economic data has resulted in rising interest rates. Investor anticipation of a taper announcement pushed US bond rates to 3%. At the conclusion of The Fed's Open Market Committee meeting in December, The Fed announced that they would reduce bond purchases by $10 Billion a month starting in January. They further stated that depending on the data, they would continue reducing purchases throughout 2014.
Canadian bond returns during the past year were -1.2%. This is only the third year of negative bond returns since 1979. Bond returns over the last two years were a miniscule +1.2%. With current rates being as low as they are, rate increases will likely result in bond returns similar to the last two years. We currently prefer short term bonds so our clients are positioned to take advantage of potential reinvestment opportunities presented by higher interest rates.
We do not subscribe to the theory that rising interest rates will be negative for stock markets. An increasing interest rate environment accompanied by a growing economy is typically positive for stock markets. These conditions are currently present in the US and to a lesser degree in Canada. The US economy is forecasted to grow 2.5% - 3.0% in 2014, with Canada facing more modest growth of 2.0% - 2.5%. Both growth forecasts are an acceleration from the 2013 GDP growth rates. The US stock market surged with the Feds announcement of its reduced bond purchases. The Fed also surprised the market by promising to keep interest rates at current low levels for "an extended period of time". While this appears to be positive in the short term for financial markets, an accelerating US economy will probably make this a short lived promise.
There has been a fair amount of discussion concerning the potential of a stock market crash. We believe this is unlikely to occur. The crash argument hinges on the stock market being in an asset bubble created by low interest rates. It is extremely rare that so many pundits correctly call a bubble in a timely manner. When looking at the fundamentals compared to prior bull markets, stocks are not overvalued. Stocks on average trade at 15 times earnings, which is close to the historical average (Chart 1). Stocks are neither historically expensive nor cheap. With 8% earnings growth forecasted for 2014 (and 2015), there is still upside embedded in individual stocks.
Chart 1: S&P Trailing P/E
Source: Deatsche Bank
We did see a minor stock market correction (around 5%) near the end of September. We expect there will be at least one, if not more, corrections in 2014. This does not change our belief that equity markets offer reasonable returns for the foreseeable future.Our discussion up to this point has been predicated on a reasonable US GDP growth rate. To date, growth has been somewhat tepid. Having said that, all the variables are in place so that 2014 might be the year where growth accelerates above 3%. Contributors to this would be improved employment rates, a better than expected housing recovery, growth in auto sales and the wealth effect.
2013 US GDP growth was depressed by approximately 2% in part due to higher taxes and reduced government spending. This follows two years of fiscal spending dragging down growth by about 1% per year (light blue line in Chart 2). US Government spending has been declining since 2009, while private sector GDP has grown at a 3.3% pace during the same period. Most of this fiscal spending handicap will disappear in 2014. State and local governments are beginning to invest in long delayed infrastructure projects. The Federal government recently passed a two year budget with less severe spending cuts than originally planned. The budget deal also reduces uncertainty by lowering the risk of a government shutdown due to legislative dysfunction. This is positive for the stock market, as investors dislike uncertainty and try to avoid. With government spending not impeding GDP growth, the US economy has potential to grow at something closer to 3.5% in 2014.
Chart 2: Real GDP
Source: BEA, Haver, Deatsche Bank
Source: The Federal Reserve, J.P. Morgan
Stocks are currently more attractive than bonds. While bonds are an important part of a diversified portfolio, their returns will be below historical levels. We see positive returns for both the US and Canadian stock markets but not to the same degree as 2013. Going forward, stock selection and being in the right sectors will be an increasingly important part of generating above average returns. Condor Asset Management has demonstrated that we can navigate the market risks and provide superior returns. Please contact us at Condor to see how we can aid you in designing a portfolio to help you achieve your financial goals.
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