Nuggets From Earnings Calls

The fiscal payments that the government’s put out plus what the Fed’s done is, effectively masked what are some pretty severe underlying problems in the economy.

You know basically everybody is bluntly struggling. Nobody can figure out why the stock market is where it is. And everybody at the margin unless you are directly volume impacted for whatever reason by COVID in a positive way everybody’s basically off. So industrial production comes back but it’s still 11% down year-on-year. So when positive readings are positive readings from what was a really negative number. The struggle I’m personally having with a lot of the data as I watch continuing claims they publish a number of 17 million plus or minus people but there’s 32 million people getting unemployment benefits today, right, because of the Cares Act special provision that allow sole proprietors and gig workers to get unemployment. So 32 million people getting unemployment out of 150 million U.S. workers. Yet we’re saying the unemployment rates only whatever they’re quoting today 13%. I can’t connect the dots.

William S. Demchak Chairman, President, & CEO PNC Financial Services

Earnings calls at their finest.  The banks kicked off the cycle and this Q&A snippet was gratis the 7th largest bank in the US.  I have to admit it warms the cockles of my heart to see a public affirmation of something I’ve had trouble connecting the dots with as well.  With a leader like this, it’s little wonder as to why I added to my holdings prior to earnings.

The other side of the coin was graced by Larry J. Miller, Chairman, President and CEO of Codorus Valley Bancorp.  Slipped into the news cycle was an obscure press release announcing declaration of a dividend.  No commentary, no explaining – not even an acknowledgement that the dividend was slashed by a third or more.  The only potential reference was an 8-K in April that referred to one commercial loan deemed fraudulent.  I haven’t sold yet as I want more answers – like recovery potential, insurance mitigation, management culpability and the status of their annual stock dividend.

I’m not reading too much into the bank earnings numbers as the good times are centered with the investment banks.  Consider the DOW performance this week without JPM or  GS as a catalyst.  The downside is that their stellar results were largely a result of trading desk profits – a result of volatility in the markets.  The skeptic in me wonders how the proverb Live by the sword, die by the sword pertains…

Wells Fargo cut their dividend as well – the magnitude was the surprise here.  For once a case can be made that it’s a bargain if one has a long term view.  The question I have is how much of this has political undercurrents as WFC has been a Democratic talking point for some time now.  Is the Fed’s action an attempt to neutralize this issue or perhaps an indication that the Republicans can show a little leadership?  The alternative narrative is more dire as it would be an acknowledgement by the Fed of a worsening economic environment requiring additional dry powder.  Stay tuned …

Then there was Home BancShares, an Arkansas based company that acquired one of my Florida banks.  Their CFO generally touted the same theme as other banks until, “the COVID-19 crisis and the resulting governmental response has created a tremendous amount of excess liquidity in the market. We believe this is a good thing for the banking industry and the economy.”  Excess liquidity being good for banks is like saying margin compression is good for US manufacturing.  The CEO added additional color stating, “Flooding the country with liquidity was certainly the right thing to do, but somebody soon has to pay the inflation factor. Writing five-year low rate fixed loans will — those people who wrap those will pay the price. I’m sorry. Banking, we must have forgotten what caused inflation over the years, particularly since we’ve flooded the world with liquidity, what if that we slow inflation down with.  Remember, what the Fed uses is raising rates dummy. So, get ready when this is over for raising rates.”  Ahah!  All well and good if only it had stopped there.

Someone must have pulled his chain as the call digressed into a rant against shorts (“They will attempt to run a stock in the ground if they can make nickel. These people add nothing to the world and are vultures…” and “I’m asking our congressional leaders to ask the SEC to stop the shorting of bank stocks.”) and Wells Fargo (Wells Fargo didn’t help us either. And those guys ought to be tarred and feathered, and it looks like that might be what’s happening to them.”) and fealty to the President for his lead with PPP and stock buybacks, “we stopped buying back stock the day the President asked us to (via television).  The topper?    “I hope my shareholders understand that I am the largest individual shareholder. So, I’m going to do what’s totally in the best interest of all shareholders, whether other people like it or not.” on his response to last year’s shareholder activists.

The result of this exchange was to spur me to revisit my ownership rationale.  First, this issue was acquired via a merger, with the initial reason being exposure to Cuba (US Affairs account and Cuba-centric Mastercard for travelers).  Subsequent to the merger, Centennial Bank (HOMB) quietly discontinued this offering.  I’m unsure of the US government account, but the government’s website directs you to contact Western Union.  My sale order was executed this afternoon (Friday).  The proceeds will be redeployed next week.

At its peak, HOMB delivered 0.19% of my dividends (last quarter 0.14%), so this sale melds nicely with my revised strategy of shedding peripheral issues and increasing those with greater assurance of staying power.  Besides, I was never a fan of their marine lending division.  It also reminded me of a Kevin Z comment on one of Bert’s posts.  “My ultimate goal is 100 companies paying 2k per year on average. This would protect me from reductions as each company would only represent 1% of my income.”   Assuming he has the time to manage his portfolio, my only advice is Be careful, it’s easy to overshoot 100 (said as I work my way back down towards 100).

Fasten your seatbelts as this fun has only barely begun!  Stay safe.