Thursday, July 17, 2008

JP Morgan Puts on a Brave Face

JP Morgan (JPM) released Q2 results and told everyone that Bear Stearns does not taste very good. At the same time they are experiencing substantial write offs in most operating areas as credit quality worsens and spreads compress.

For a financial institution of this size it is not hard to release a blizzard of numbers and declare disclosure has occurred. So you look at the little things and see if you can guess/intuit/extrapolate and otherwise back into reasonable conclusions. By the way SEC, if you hear rumours of any kind about JP Morgan just look at these statements and wonder if you are well informed. Even JP Morgan will admit in an exculpatory caveat that the numbers are on a managed basis.

Several thoughts come to mind. The release has little to no mention of the words Sub-Prime, Collaterized Debt Obligations, Freddie Mac and FannieMae. JP Morgan claims to be experiencing write offs on the consumer side. They make no mention if this is still from the funny money derivative stuff or are their own direct lending efforts coming up short. Don’t tell me everything was parked in investment banking we all know that’s not really accurate.

Everyone has been watching Freddie & Fannie, waiting for the other shoe to drop. Somewhere in JPMorgan the risk management guys should know to the penny what their exposures are. The press release did not cover the issue. Perhaps it’s hidden somewhere in the unmanaged portion of their financial statements and investors have not found it as yet.

The gunslinger mentality dies hard. The press release mentions their prowess as number 1 in several investment banking categories. Yet at the same time they are writing off huge amounts within the investment banking area.

Wednesday, July 16, 2008

SEC Secrets Governance

The SEC recently announced that they wanted to crack down on rumours; particularly if you are passing around bad rumours which contain inaccurate information. One wonders what the penalty would be if you passed on a good rumour with accurate information. That constitutes the inherent conundrum of financial information.
The SEC has authored and facilitated a vast body of legislation and regulation which has allowed the current climate to develop. Why do rumours have the power that they do? The answer is: the rumours, ugly as they are when uttered, are plausible at the time. Financial reporting, derivatives, collaterized obligations, accounting standards etc. have all created a wall of worry that investors do not seem to be able to surmount.

Financial communications is more about message strategy than actually reporting results candidly. So called bad news is bled out into the market place after market close, frequently on Friday before a long weekend. So called good news comes out before market opens affording trading opportunities. Good news usually has more details. Bad news is more clipped and lacks depth.

Ugly rumours take root in confusion. When companies are hard to understand and fathom, rumours will provide the emotional guessing that straight financial information should have quenched. It’s not a surprise that financial institutions are having a very rough ride.

Be honest now. When was the last time you felt you understood the financial statements of a large commercial bank or i-bank. Everyone is looking at proxy metrics to analyze these puppies. Housing starts and consumer spending are better tracking metrics for consumer lending than anything the consumer lender may say about itself. And then we have to listen to pundits and experts to decipher.
Now take a look at oil companies. We know the price of oil. We know our economies are energy inefficient. That basically is the investment model for energy stocks. Wasn’t that easier.

Rumours are a manifestation indicating a lack of confidence. Sure the SEC can chase down some of the more egregious offenders who have deliberately either created or passed around false information. But in an environment of uncertainty so much of the bad news is really undisclosed truth.

If the SEC wants to change the culture it needs to deal with the root causes. Too many companies do not explain themselves and purposefully avoid the truth until it is an eleventh hour crisis. Right now we can trade the VIX and take a view on market volatility. The rumour mill trading allows investors to take a view of market credibility.

Tuesday, July 15, 2008

Proctor & Gamble-No Rumors Here

Proctor & Gamble (PG) announced that they would be releasing Q4 results on Aug 5. Q4is always critical just in case there is any house keeping and or realignment of the lines of battle in the financial sense. In the same week that the market is rife with talk about rumour mongering and how the SEC will protect us against this scourge P&G makes the very definitive statement that:

“The company continues to expect sales growth for the quarter of 8 percent to 10 percent, organic sales growth in line with previous guidance and diluted earnings per share of $0.76 to $0.78.”

That’s all she wrote folks. It’s truly nice that P&G has such a firm grip on its financial affairs. But when is disclosure disclosure and when is a rumour a rumour. The idea of an earnings announcement is that the bean counters have finished their work and the board which represents the shareholders (large and small) has reviewed the statements and signed off. So is this faux disclosure so as to prevent rumour? Has the board reviewed the statements and signed off on the numbers three weeks before the scheduled disclosure date?

When does guidance morph into disclosure? A two cent EPS range for the entire year for a company this size is tantamount to a direct hit.

Monday, July 14, 2008

Infosys Rising Labour Cost

Infosys Technologies (INFY) Q1 revenues that were up approximately 24% from the corresponding quarter last year. The sequential growth was anaemic at 1.1%. Infosys has made a reputation by leveraging cheap skilled overseas labour to replace expensive skilled domestic labour. Pay someone $2 per day instead of $15 dollars per hour and the business model should work spectacularly.

Has Infosys lost its way? Or is the value proposition losing steam. Look at the comment that was included in their earnings release (I assume that the bolding was included in the original release)

“Margins for the quarter were impacted due to increases in salary and visa costs which to some extent were offset by rupee depreciation,” said V. Balakrishnan, Chief Financial Officer. “We believe that the currency market will remain volatile in the short term.”

The comment attempts to focus attention on the currency market as the main culprit. Labour as a commodity is increasing in price much as oil and other raw materials. Running away to cheap labour countries is becoming less efficient as a strategy. Currencies will eventually realign and wage relativity will narrow.
What will be next for Infosys? Infosys needs to revisit their value proposition.