Thursday, February 2, 2012

The asset management sector has been weak over the past few days based on misses at LM and WDR. Those misses aren't surprising, though, because outflows have been unmerciful during late 2011 and 2012 (32 of the past 34 weeks yielded outflows!). But that is exactly when one should buy a cyclical like an asset managers.

Remember what Roy Neuberger once said: "Buy cyclicals when the factory door is padlocked. Sell cyclicals at the sound of trumpets."

Like discount brokers, traditional asset managers have likely seen the nadir of their fundamentals. Mutual fund inflows are trickling back, but there is a huge potential of a massive rotation out of bonds and into stocks that could materially change the earnings picture for the group.

I would be a buyer of the group now.

Now look at housing-related stocks (particularly the homebuilders) and consider their quick and substantial share price advance, well before the housing markets have improved (in price and turnover activity).

The same should occur in the asset managers, as stocks typically discount news well before there is an inflection point in fundamentals.

This is interesting: ETFC, which has often been rumored to be a potential takeover target of rival AMTD, named Frank Petrilli its new chairman. He replaces Chief Executive Steven Freiberg, who held the role on an interim basis since last spring.

Petrilli, 61, was most recently CEO of Surge Trading. But he also has past ties to TD, a 45% owner of TD Ameritrade. As noted by Dow Jones Newswires, Petrilli held several positions at TD Waterhouse, formerly a U.S. unit of TD Bank Group, from 1995 to 2004. He reported to the Canadian bank's current head, Ed Clark.

"We suspect Mr. Petrilli's relationship with Mr. Clark is strong and can only benefit E-Trade over the longer-term as it looks to potentially unlock the embedded value of the franchise with, in our view, its #1 acquisition/merger candidate, TD Ameritrade," Sandler O'Neill analyst Richard Repetto told clients in a note.
-- Barrons

This Barron's piece yesterday, "E-Trade Names New Chairman With Ties To AMTD: Coincidence?" piqued my interest and raised the specter of a possible takeover.

I have concluded that despite no apparent short-term catalyst, there is little risk in the shares.

Moreover, the recent weak DARTs monthly data likely represents the nadir of the discount brokerage cycle for both ETFC and SCHW.

ISM comes in at 54.1, slightly below expectations.

Fitch says Greece will default. Big surprise!

The ADP report was basically slightly less than consensus -- it should have no impact on risk assets, as it probably reflects some reversal of seasonal adjustments which distorted December's release.

Run, don't walk, to read the monthly commentary from Pimco's Bill Gross, "Life - and Death Proposition."

Stated simply, our monetary policy (coupled with global easing) is inflationary. In the fullness of time, bonds will suffer.

Now the only question is how we define "the fullness of time"!

Fears of hard landing in China eased as China's January manufacturing index rose to 50.5 (expectations were 49.5) vs. 50.3 in December. This is the best print since September 2011. New orders advanced for the first time in three months while shipments rose to best level in more than six months. As a perspective, China's real GDP increased 10.4% in 2010, +9.2% in 2011 and consensus lies at +8% to +8.5% for 2012 (bottoming at +7.5% in the first half). Like the rest of the planet, I expect China to ease in the months ahead (with a bank reserve requirement reduction imminent).

The January Chicago Manufacturing Index came in at 60.2 (expectations were 63) compared to December's 62.2. This was the third consecutive month with a reading over 60. It is important to recognize that 60.2 is indicative of relatively robust growth and compares positively to the long-term average of only 54. Importantly, the production and order components were strong. The equity market flinched, but recovered nicely from this news.

The January conference board's index of consumer confidence came in at 61.1 vs. 64.8 in December and against expectations of 68.The print contradicted the previously released Rasmussen and University of Michigan consumer numbers. Again, the market rebounded from this release.

Case-Shiller's home price index continued to fall. There was a slight reacceleration in home prices' rate of decline. November prices (year over year) were down by 3.7% (previous months' drop was 3.4%). I have written that the aggregate home price indices fail to address the developing bifurcation in the residential real estate market, with areas of the country that are unencumbered by a large shadow inventory of unsold homes doing far better (e.g., the D.C.-to-Boston corridor). Moreover, bank lending standards are easing (based on the most recent survey), the ownership/rental equation is improving, mortgage lending rates are at historic lows and the jobs market is experiencing a slow - very slow - improvement -- all positive factors contributing to a stabilization of the U.S. housing markets. I expect no price degradation within receipt of the 1Q2012 Case-Shiller Index release.

The employment cost index continues to suggest that unit labor costs (and wage inflation) will be tame, likely extending a market-friendly profit/dividend/share buyback cycle. The wage index was +0.4%, in line with consensus. For the year, private wages increased by 1.6%. I want to emphasize that corporate profit margins typically don't contract until unit labor costs increase by greater than 3.5%. We are under 2% now!