According to GuruFocus list of 5-year lows, these Guru stocks have reached their 5-year lows: Science Applications International Corp, Grana y Montero SAA, Piedmont Office Realty Trust Inc, and OiSA
Science Applications International Corp (SAIC) Reached the Five-Year Low of $32.20
The prices of Science Applications International Corp (SAIC) shares have declined to close to the five-year low of $32.20, which is 26.3% off the five-year high of $39.88. Science Applications International Corp is owned by one Guru we are tracking. Among them, 1 have added to their positions during the past quarter. Zero reduced their positions. Science Applications International Corp has a market cap of $2.76 billion; its shares were traded at around $32.20 with a P/E ratio of 18.50 and P/S ratio of 0.45. The dividend yield of Science Applications International Corp stocks is 0.87%.
Science Applications International Corp announced their 2014 third quarter fiscal results with revenues of $974 million and net income of $22 million.
GuruFocus Guru Private Capital initiated its position in SAIC and bought 211,409 shares.
Director Robert A. Bedingfield bought 2,000 shares of SAIC stock on 12/17/2013 at the average price of $32.15.
Grana y Montero SAA (GRAM) Reached the Five-Year Low of $20.90
The prices of Grana y Montero SAA (GRAM) shares have declined to close to the five-year low of $20.90, which is 17.3% off the five-year high of $22.14. Grana y Montero SAA is owned by four Gurus we are tracking. Among them, four have added to their positions during the past quarter. Zero reduced their positions. Grana y Montero SAA was established in Peru on August 12, 1996 as a result of the equity spin-off of Inversiones GyM S. Grana Y Montero Saa has a market cap of $2.75 billion; its shares were traded at around $20.90 with a P/E ratio of 24.60 and P/S ratio of 1.24.
Grana y Montero SAA reported their 2013 third quarter results. The Company announced net income of S/. $135.8 million ! and revenues of S/. $2.8 billion.
Piedmont Office Realty Trust Inc. (PDM) Reached the Five-Year Low of $16.73
The prices of Piedmont Office Realty Trust Inc. (PDM) shares have declined to close to the 5-year low of $16.73, which is 32.6% off the five-year high of $21.32. Piedmont Office Realty Trust, Inc. is owned by one Guru we are tracking. Among them, 0 have added to their positions during the past quarter. One reduced their position. Piedmont Office Realty Trust Inc., a Maryland corporation was incorporated in 1987. Piedmont Office Realty Trust Inc. has a market cap of $2.7 billion; its shares were traded at around $16.73 with a P/E ratio of 33.10 and P/S ratio of 5.02. The dividend yield of Piedmont Office Realty Trust Inc. stocks is 4.78%. Piedmont Office Realty Trust Inc. had an annual average earnings growth of 27.60% over the past five years.
Piedmont Office Realty Trust Inc. reported 2013 third quarter results. The Company announced net income of $19.1 million and revenues of $145.1 million.
Director W Wayne Woody bought 792 shares of PDM stock on 08/21/2013 at the average price of $17.2.
Oi SA (OIBR) Reached the Five-Year Low of $1.63
The prices of Oi SA (OIBR) shares have declined to close to the five-year low of $1.63, which is 87.6% off the five-year high of $11.48. Oi SA is owned by three Gurus we are tracking. Among them, zero have added to their positions during the past quarter. 3 reduced their positions. Oi SA is a telecommunication service providing company in Brazil. Oi Sa has a market cap of $2.67 billion; its shares were traded at around $1.63 with a P/E ratio of 4.50 and P/S ratio of 0.14. The dividend yield of Oi Sa stocks is 23.36%. Oi Sa had an annual average earnings growth of 10.00% over the past 10 years.
OiSA announced their 2013 third quarter results with revenues of R$7.1 billion and net income of R$172 million.
GuruFocus Charles Brandes, who owns 751,723 shares as of Sept. 30, 2013, kept his position in Oi SA unchanged.
Go h! ere for the complete list of five-year lows.
Also check out: Charles Brandes Undervalued Stocks Charles Brandes Top Growth Companies Charles Brandes High Yield stocks, and Stocks that Charles Brandes keeps buying
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Wednesday, January 28, 2015
Amazon Just Validated NVIDIA GRID
Hold onto your hats, NVIDIA (NASDAQ: NVDA ) shareholders, because Amazon.com (NASDAQ: AMZN ) may have just made things a whole lot more interesting for your favorite graphics chip specialist.
But first, some background...
Thanks to a stronger-than-expected third-quarter report last week, NVIDIA stock is currently trading within just pennies of its 52-week-high. To be sure, NVIDIA handily exceeded analysts' earnings expectations in a performance owed largely to a long-awaited uptick in sales from its mobile-centric Tegra 4 line.
However, NVIDIA can also attribute those results to its surprisingly resilient GPU segment, which, even in the face of falling PC sales, has managed to maintain much of its prominence thanks to a combination of sales from Tesla's supercomputing line of GPUs, a loyal stable of hardcore gamers buying its GeForce products, and wins from its cloud-based GRID GPU offerings.
In case you're not familiar, NVIDIA GRID affords graphics-hungry users the ability to leverage NVIDIA's world-class GPU acceleration over their networks -- something anyone who's tried to run any graphics-intensive program can appreciate.
NVIDIA GRID is a groundbreaking cloud-based graphics solution. Image source: NVIDIA.
Here's where Amazon comes in
On Wednesday afternoon, Amazon.com officially took the wraps off Amazon AppSteam, which it describes as a "low-latency service that lets you stream resource intensive applications and games from the cloud" -- something the company notes is otherwise impossible because of existing "GPU, CPU, memory, or physical storage constraints of local devices."
Sound familiar? It should, because only two days before NVIDIA's earnings conference call, both companies lauded a newly deployed instance of Amazon's Elastic Compute Cloud, which is backed by -- you guessed it -- a NVIDIA GRID GPU instance with 1,536 parallel processing cores.
The AppStream service, then, is a logical extension of Amazon's newly acquired graphics computing power. If you're still having trouble visualizing what Amazon AppStream is all about, here's a freshly released video from the Web giant:
Source: Amazon.com
Of course, while Amazon AppStream could undoubtedly change the way applications are developed for millions upon millions of connected mobile devices, it also serves as arguably the first massive validation of NVIDIA's cloud-based GRID technology.
After all, given all the attention surrounding delays in the commercial rollout of NVIDIA's Tegra 4 processor this year, recent news concerning GRID has been comparatively sparse.
Sure, back in March, NVIDIA not only boasted that Citrix, Microsoft, and VMware were already offering their own respective GRID-powered software, but it also announced its rack-mounted GRID Visual Computing Appliance to target small and medium-sized businesses. Then, in May, GRID grew a bit larger when the folks at Citrix also incorporated it into XenDesktop 7. Finally, less than two weeks ago, GRID even won a place powering the Playcast cloud-gaming service from France's Bouygeus Telecom, which is now being offered to an impressive 1.5 million subscribers.
However, none of those wins carry the same clout as having the formidable, fast-growing Amazon Web Services in NVIDIA's corner. Remember, based on Amazon's most recent earnings results, sales from its Web Services division are on track to hit the $1 billion mark in the fourth quarter alone, which would bring AWS' total 2013 revenue to an estimated $3.2 billion.
Of course, that doesn't all translate to NVIDIA's bottom line. But even if we ignore NVIDIA's significant opportunities in other markets, merely winning Amazon's approval should go a long way toward convincing the world of the viability of its long-term, cloud-based vision.
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The new iPad Mini Retina might be hard to come by this quarter, given all the reports of supply constraints. Well, we're going to be sure to get a few -- and give them away! That's right: For the first time ever, The Motley Fool is hosting a contest where you can win a free iPad Mini Retina. All you have to do is tell us why you love The Motley Fool by clicking here! We'll pick the three most Foolish submissions to receive a free iPad Mini with Retina display.
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Auto Parts: You Must Own One Stock in This Sector
Popular Posts: 3 Best ETFs to Own Until You Die5 Safe Dividend Stocks Yielding North of 7%Auto Parts: You Must Own One Stock in This Sector Recent Posts: Auto Parts: You Must Own One Stock in This Sector 5 Safe Dividend Stocks Yielding North of 7% Time to Tune in to AMC Networks View All Posts Plenty of sectors have at least one must-own long-term stock. With a little thought and research, they aren’t too hard to find. But in a few cases, little subsectors might contain companies that don’t get a lot of recognition despite their products being intrinsic to our everyday human experience.
Cars come to mind, and you could probably get away with owning a common car dealer like Toyota (TMC). The problem with this approach, though, is that auto manufacturers are economically sensitive and can have really bad years. That's why I go one level deeper to what I call "infrastructure" plays, which in this case means auto parts.
See, cars are always going to be on the roads all over the world. They will always be sold because all cars eventually die. And along the way, no matter how well-engineered they are, they will need parts and require maintenance. That's why you should own a stock in the auto parts sector for the long term. The challenge is in picking the right one. Here's a quick look at your options:
AutoZone (AZO) is a $15 billion company with 5,109 stores in the US and Mexico. It holds $4 billion in debt and $133 million in cash and generates very reliable free cash flow of $800 million to $900 million annually. AZO has a projected long term-growth rate of 14.8%, and trades at a FY13 P/E of just 14. That’s a lot of debt for the company, but it’s cheap at just under 5%, and very manageable.
Genuine Parts Company (GPC) is a $12 billion company with 1,100 Napa Auto Parts stores in the US, Canada, and Mexico. It holds $250 million in debt and $197 million in cash. Free cash flow improved to $800 million in FY12 from $600 million in FY11. GPC has a projected long term-growth rate of 10%, and trades at a FY13 P/E of 19, so I consider it vastly overvalued.
Advance Auto Parts (AAP) is a $7.4 billion company with 4,000 stores in the US, Canada, and Mexico. It’s $604 million in debt is almost entirely offset by its $520 million in cash. Free cash flow is a bit inconsistent, swinging up and down over the years, but presently at a very solid $410 million. AAP has a projected long-term growth rate of 13.5%, and trades at a FY13 P/E of 18, so it is also overvalued.
O'Reilly Automotive (ORLY) is also a $15 billion company with 4,000 stores in the US alone. It holds $1.4 billion in debt and $366 million in cash, and generates strongly increasing levels of free cash flow — from $350 million in FY10 to $800 million in FY11, up to $950 million in FY12. It has a projected long-term growth rate of 17.3%, and trades at a FY13 P/E of 18.5. The stock is a bit pricey, but the fantastic cash flow trend, and 3% interest on debt makes it a compelling consideration.
Pep Boys (PBY) is a $690 million company with 750 stores in the US. It holds only $197 million in debt and $65 million in cash. Its free cash flow situation is less compelling, with only $34 million in FY12, coming after a breakeven FY11 — that's what you get with a smaller company trying to expand its footprint. It's a bit slower growing at 14% long-term, and trades at a current year P/E of 13, so it is arguably a tiny bit undervalued. Buying here means you are betting they will win market share in a very crowded field.
Motorcar Parts of America (MPAA) is the tiniest entry at only a $208 million market cap. It's a bit more specialized, focusing more on alternators, starters and wheel hub assemblies. It also distributes only through the DIY stores. MPAA sits on $100 million in debt and $16 million in cash. It’s cash flow negative and trades at a P/E of 14 on long term growth of 15%. I'd stay away from this one, given the cash flow situation.
In conclusion, I think you want to be with AutoZone or O'Reilly here. The latter is on a stronger cash flow trend, but both appear to be slightly undervalued, and very good stocks to own.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.
Monday, January 26, 2015
Android's Ease-of-Use Advantage Over iPhone
NEW YORK (TheStreet) -- This is a sore subject, I know. I will try to make the case that for some people, getting up and running on a Google (GOOG) device such as Android is easier than on an iOS device such as the iPhone.
I can feel the blowback from the armies of Apple (AAPL) fans already. People get bent out of shape when you dare suggest that their favorite gadget isn't the best at everything.
I am focusing this "ease of use" analysis on one thing in particular, for reasons that will be obvious a little later in this article. This focus is account management and synchronization.
What do I mean by account management? Regardless of which mobile platform you use -- Android, iOS, Microsoft (MSFT) Windows or BlackBerry (BBRY) -- we have now moved to a cloud-centric world where your settings, app store and other functions are tied to a cloud account. You basically need one in order to operate your mobile gadget in any meaningful way, or even at all. Another word for account management is identity, which in turn is represented by an email account. Once upon a time -- say, 1996-97 -- you got a Hotmail account. Then you switched to Yahoo!, say around 1998-99. By 2005 you started graduating to Gmail. At 425 million accounts and growing fast, Gmail is what most computer-savvy people in the Western world are using more and more. Therefore, for most relevant people, they are now Gmail users and are confronted with which smartphone to buy. Let's examine the two scenarios of getting up and running on Google/Android vs. Apple/iPhone: 1. Apple: What to do about iCloud? When you first get your iPhone and fire it up, you are asked to enter or create an iCloud account. Here is where the confusion begins. It is not immediately obvious what an iCloud account is, or what it could be from an identity perspective. Do I have to create a new email address? What can my login be? Nobody who isn't yet an Apple customer has an @iCloud.com email address, and even those who do, don't (want to) use it as an actual email address. There are at least two reasons for this:
A. I already have an email address that I want to continue to use, thank you. I'm just looking to set up a new phone; not set up a new email address.
B. Having your email address with Apple basically makes you suspect that you might get locked into Apple. What would happen if you want to switch to Android or Windows Phone later? What about your PC, switching to Windows or Google's Chrome OS? Consumers are reluctant to lock-ins. In contrast, you already have Gmail and it is obvious that it's available to use on every kind of computer, large and small.
Perhaps you could still create an iCloud email account, but use some other account such as Gmail for your Apple ID? Who knows? The point here is that this first step in your interaction with the iPhone has already brought you great confusion and uncertainty.
What is the advantage of having an iCloud email address as your iCloud ID, compared to having some other email address such as Gmail? Perhaps there is an answer somewhere but it sure isn't anywhere near self-evident as to what that answer might be. 2. In contrast, Google: Setting up your Android. Turn on the Android for the first time. Enter your Gmail address and password. Done. Everything has now been synchronized. End of story. Notice the difference? With your new Apple device, you are induced to create a plan for how your online ID and account management should be set up. How are you going to deal with cross-platform issues such as using numerous products from Google, Microsoft and Apple as applicable now or in the unknown future? Should you create a new email address? Which existing one to use? With Google? No such question at all. You already have an obvious ID and you're in -- all done. I would argue that this extends even further to things such as documents. iCloud creates fine documents to be sure -- a worthy competitor to Microsoft Office in most respects. Likewise, you can argue that Google Docs is a bit simple and unsophisticated with respect to the richness of the features inside the app itself.
However, there is never any confusion about Google Docs synchronizing to your account and it being available on every platform. Need it on your iPhone or iPad? No problem -- the Google Docs are eminently available.
In contrast, what about accessing and editing iCloud documents on your Android smartphone or tablet? Whoops. Good luck on an elegant solution to that one.
Apple's comparative problem doesn't end with the initial account setup. Depending on how many iCloud accounts you set up -- using the new iCloud email address, plus something based on your Gmail address, perhaps something else as well -- you could get them mixed up between all of your Apple devices over time.
For example, you may have signed in under one iCloud account on your Mac PC. Then under another iCloud account when you set up your iPhone, and on another when you set up your iPad. I hear these kinds of scenarios from iCloud users all the time. I think most people would agree that these kinds of scenarios almost never happen with Android devices. The reason for this is that you're not creating one (or more) new account IDs, and you're not confused which is which. You sign in with your existing Gmail account everywhere and you're not induced to try something else. No confusion. I can hear the cries from the Apple back-benchers already: I have never had this problem! And you may be right. Clearly, some Apple users "just pick" one iCloud ID, stick to it or only use Apple devices and never look back. Some would refer to these people as the most loyal of iSheep; others perhaps don't rely on the Apple devices for everything they do. Yet, others have encountered a problem of conflicting or suboptimal Apple IDs chosen, go to the Apple Store and find some help in changing or consolidating these accounts. And that's great. In the end, they get it to work -- after some technical support. But it's not a matter of it working or not. The issue was ease of use. Whatever other issues there are with these devices, at the core is account management -- your choice of user identity and email address, and on this point it seems Google leaves almost no source for confusion. In this aspect, Google does have a somewhat "unfair" advantage over Apple: The issue of ID management is greatly enhanced when you already are using that company's email as your primary email to begin with. At over 425 million users, Google easily trumps Apple in this regard. Google's email ID advantage then translates into the less-confusing device setup and synchronization experience on smartphones, tablets and PCs. The problem I describe is perhaps not easily seen by someone who has only had one or two iOS devices, set them up once and have been happy campers since. They're going to ask, "What the heck is he talking about?" It is true this problem exposes itself more clearly the more devices you use, including more devices on more platforms -- so you can compare setting up new devices every day on Android, iOS, Mac, Chrome OS and more. With that, I buckle up and brace for the worst. At the time of publication the author was long AAPL and GOOG. Follow @antonwahlman This article was written by an independent contributor, separate from TheStreet's regular news coverage.
This contributor reads: RealClearPolitics Drudge Report Rush Limbaugh Engadget The Verge On Twitter, this contributor follows: Kevin Eder Byron York Dan McLaughlin David Limbaugh Tyler DurdenSunday, January 25, 2015
Gay rights bill gets Senate vote
Speaker John Boehner reaffirmed his long-standing opposition to the Employment Non-Discrimination Act Monday. "The Speaker believes this legislation will increase frivolous litigation and cost American jobs, especially small business jobs," said Boehner press secretary Michael Steel.
Today's scheduled procedural vote in the Senate — which needs 60 of the 100 senators to move forward — could clear the way for the first vote since 1996, when a similar bill failed in the Senate by a single vote.
The bill passed a Senate committee in July on a bipartisan 15-7 vote. Republicans Orrin Hatch of Utah, Mark Kirk of Illinois and Lisa Murkowski of Alaska all voted for it in committee.
Sen. Susan Collins, R-Maine, is a co-sponsor, and Sen. Dean Heller, R-Nev. said Monday he supports the bill because it "raises the federal standards to match what we have come to expect in Nevada."
With at least five Republicans in favor, the bill can pass with the support of 53 Democrats and the two independents.
Hatch's support is especially noteworthy. He voted against the proposal the last time it came up for a vote in 1996, saying it would result in a "litigation bonanza."
''The moral and religious sensibilities of millions of Americans will be overridden by this legislation,'' Hatch said in 1996, when he was chairman of the Senate Judiciary Committee. But proponents won his support with a provision that would exempt religious schools and organizations.
That exemption does not go far enough for some social conservatives, however. Faith and Freedom Coalition founder Ralph Reed says he opposes workplace discrimination. "But this bill opens a Pandora's box of assaults on religious freedom, litigation, and compliance costs for businesses and nonprofits that will be a nightmare," he said.
A 2009 report by the Go! vernment Accountability Office found "relatively few employment discrimination complaints based on sexual orientation and gender identity" in the 22 states that have such laws.
Contributing: Erin Kelly of Gannett News Service
Follow @gregorykorte on Twitter.
Saturday, January 24, 2015
Morgan Stanley Reports 42% Jump in Q2 Net Income
Morgan Stanley (MS) reported its second-quarter earnings results early Thursday, beating analysts’ expectations.
Net income attributable to common shareholders was $802 million, or $0.41 per share, vs. $564 million, or $0.29 per share, in the year-ago period.
Excluding special items, Morgan Stanley earned $0.45 per share, which topped Wall Street expectations of $0.43 cents. The Q2’13 results included a gain related to the bank’s debt valuation and a charge tied to its purchase of Citigroup's remaining share of the Morgan Stanley Smith Barney joint venture.
Total revenue jumped 22% from last year and 4% from the previous quarter to $8.5 billion, while expenses increased roughly 12% year over year and 2% quarter over quarter to $6.73 billion.
“This quarter, we saw significant year-over-year revenue growth in each of our five major business units and higher year-over-year profitability,” said Chairman and CEO James P. Gorman (left), in a press release. “Of particular note, equity sales and trading results were strong across all products and regions … In addition, we look forward to the full benefits of the recently completed Wealth Management acquisition. We continue to work as one firm to realize the advantages specific to our business model.”
Wealth Management
The Wealth Management unit had net revenues of $3.5 billion, up 10% from last year and 2% from a year ago. The group’s pretax margin was roughly 19%, up from 17% in Q1’13 and 13% in Q2’12. Net income was $326 million, representing a jump of 41% over the year-ago period and an increase of 28% from the prior quarter.
The headcount of Morgan Stanley advisors is 16,321, an increase of 37 reps from the prior quarter and a decrease of 157 reps from the year-ago period.
The Morgan Stanley financial advisors had average fees and commissions (also known as production) of $866,000 in Q2’13, up 2% from $851,000 in Q1’13 and up 12% from $770,000 in Q2’12.
Fee-based asset flows for the quarter were $10 billion, down 35% from the prior quarter’s $15 billion but up 233% from $3 billion in the year-ago quarter.
Total client assets were $1.78 trillion at quarter end versus $1.79 trillion in the earlier quarter and $1.64 trillion last year. Fee-based assets currently represent 35% of total assets, according to the company.
The bank's buoyant results follow a first quarter that garnered it the No. 2 spot in ThinkAdvisor's 12 Best & Worst Broker-Dealers ranking.
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Check out AdvisorOne’s 2013 Q2 Earnings Calendar for the Finance Sector.
Thursday, January 22, 2015
The Best Is Yet to Come for Outerwall
The Motley Fool is on the road in Seattle! Recently, we visited Coinstar -- now officially renamed Outerwall (NASDAQ: OUTR ) -- to speak with CFO-turned-CEO Scott Di Valerio about the 22-year-old company's well-known coin-cashing machines, as well as its more recent acquisition of Redbox, and future initiatives to expand into other aspects of the automated retail market.
In this video segment, Scott explains how Coinstar's identity and focus has evolved over the years, and how its corporate culture and values support its belief that "The best is yet to come." The full version of the interview can be watched here.
A full transcript follows the video.
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Eric Bleeker: I liked walking in the building here. You've got a history timeline of the company, and milestones, and you've got "The best is yet to come." It's a nice way of motivating people to do better. It's much better than "Maximize shareholder value," and then some smiling guy in a suit.
Scott Di Valerio: Right.
Bleeker: When you're looking at, "The best is yet to come," and getting people to think about that, when did the company culture change in that respect? Was it optimized along Coinstar from the start, and once you hit Redbox you said, "You know what? We're an automated retail company?"
How long has this thought process on becoming a larger place of the retail chain been in place?
Di Valerio: You know, companies always evolve. About four years ago, we set a strategy around the automated retail space, and really focusing the company in that area.
The company had done a number of acquisitions over the four years ago -- some which made good sense, like Redbox -- some that were kind of outside of the automated retail space, and stretched the company out where it wasn't really strong.
What we went about was a process of divesting those businesses, and then really getting innovation energy around, an engine around, bringing new automated retail solutions to the marketplace; not just for what retailers are doing today, but we're really trying to look out five and 10 years as to, "Where are retailers going, and how can we then help them in that regard?"
One of the things we're able to do in very small square footage is be a very high profitable part of the store for our retailers. In most cases, we're the most profitable square footage for our retailers. What we want to be able to do is continue that on, and bring great value to our retailers, but also do it in thinking on where they're going with their business over time.
That's what we'll stay focused on. That's why we think the best is yet to come. That's why we think we can continue to grow this company, and bring great employees into the company, and bring great returns for our employees and for our shareholders, by making it a fun place to work, an inclusive place to work, and one that really focuses on the right things, which is doing the right things for our customers, our retail partners, and for our employees.
Bleeker: Do you have any specific company values that everyone at the company knows?
I know with The Motley Fool, we have several. The last one's "Motley." Just do whatever your best trait is. Do you guys have something in place like that, that you espouse to keep people with that vision on, "The best is yet to come" and "We're looking forward to more?"
Di Valerio: We do. We have a set of great values at the company, that we established about three-and-a-half years ago. We also have turned the company around three commitments. All the employees have the same commitments as their teams do, as their bosses do, as the company does, so everybody knows the direction that we're going, and then how they fit into the company.
It's something we put in place this year which, if you think about it, everyone has to make up goals or commitments each year, and then a lot of times, you put them away until review time. Then there's also a lot of work that tends to have to go to match all of them up to see if we're going to achieve what our annual plan is, but what our strategic vision is, as well.
What we've done is we've made the company around three commitments, and all the employees have the same commitments so you know how you snap into the course that we're going. You match that up with the values that we have, as well as the work we're doing and continue to do, and build out around corporate social responsibility and sustainability, and those types of things that we've added into the company over the last couple of years.
The employees are pretty energized about where we're going, and pretty energized about how we're going about it. It's sometimes easier to get there if you don't really worry about the "how," and our employees are great about worrying about the "how" as well as the "what."
Prepare for the Q2 Earnings-Season Bloodletting
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During the second quarter, 10-year Treasury rates rocketed up from 1.87% to 2.52%. That's huge. At the shorter end of the yield curve, 3-year rates jumped from 0.36% to 0.66%.
This is going to make for some serious ugliness on bank balance sheets. In the fixed-income market, the basic math is simple: When rates go up, prices go down. That means that the piles of debt securities on bank balance sheets just took a dive during the past quarter.
We'll have a tough time saying exactly how much of an impact this will have thanks to the fact that banks can pull some different levers to try to offset these losses. But we're not completely out at sea, here, either. In the second quarter of 2004, the 10-year rate jumped from 3.86% to 4.62%, while the 3-year rate went from 1.99% to 3.16%. So we can look back at that period and see how banking balance sheets fared.
In short, the answer is that they fared poorly. By focusing in on the "other comprehensive income" (OCI) -- which includes unrealized gains (and losses) from investment securities -- we can see just how much that rate jump hammered the banks.
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| Bank | Q1-Q2 04 OCI Change | Debt Portfolio | Loss as % of Portfolio |
| Bank of America (NYSE: BAC ) | ($2.7B) | $167B | 1.6% |
| JPMorgan Chase (NYSE: JPM ) | ($1.2B) | $65B | 1.8% |
| Citigroup (NYSE: C ) | ($2.7B) | $205B | 1.3% |
| Wells Fargo (NYSE: WFC ) | ($283m) | $37B | 0.8% |
Source: SEC filings. OCI changes reflects just the change in unrealized securities gains.
This is all very back-of-the-envelope and may not be a perfect apples-to-apples comparison across banks. But JPMorgan, at least, left little doubt as to what happened in the second quarter of 2004. In a footnote to its breakdown of OCI changes, the bank noted: "The net change for the six months ended June 30, 2004, is primarily due to rising interest rates."
Fast forward to today, and it's readily apparent that similar loss levels would be extremely painful. The banks' debt portfolios are much larger than they were in 2004 -- Wells Fargo's, for instance, went from $37 billion to $248 billion. Per bank, we're easily talking about billions of dollars, perhaps $5 billion or $6 billion on the upper end.
What's worse is that interest rate spreads have recently been tighter than in 2004, and new regulations have taken a bite out of some fee income. That means that -- compared to nine years ago -- there's less potential profit on the income statement to offset the balance sheet weakness.
What will be revealing in seeing the actual numbers is the ways in which each bank positioned itself in anticipation of rising rates (I mean, come on, who didn't see this coming?). Holding debt securities with shorter maturities, for example, could lead to significantly lower loss levels versus 2004. Investors in the sector will want to keep an eye out for banks that break from the pack -- either showing larger or smaller proportional losses. That could provide some insight into which management teams have their heads screwed on straight.
The upshot to this is that while the second-quarter earnings reports may include some ugly items, the rate movements over the past quarter will actually be a positive for the banks over the longer term. Spreads widened during the quarter -- that means the long-term rates rose more in relation to short-term rates. This is a distinct positive for banks since they make much of their money via those rate spreads. Higher rates in general are a positive as well. In its first-quarter SEC filing, JPMorgan noted that a 100-basis-point increase in interest rates would lead to a $2 billion increase in annual pre-tax net interest income. A 200-basis-point increase would boost net interest income by $3.7 billion.
Even when we compare the rate action over the past quarter to 2004, there are positives. In 2004, some parts of the yield curve were starting to flatten -- that is, basically the opposite of the spread-widening situation that I outlined above.
Source: U.S. Department of the Treasury.
The rate gains this year have been distinctly the good kind (if you're a bank), leading to a steepening curve.
Source: U.S. Department of the Treasury.
And here's the real optimistic slant on all of this: A steeper yield curve is typically seen as a sign of better economic times. A healthier, growing economy is good for banks. Of course, a healthier, growing economy is also good for all of us.
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