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Yale Bock is the President of Y H & C Investments, a Registered Investment Adviser based in Las Vegas, NV. My educational background is a B.A. in Economics from UC-Irvine, a MBA from UC-Irvine, and have earned the right to use the Chartered Financial Analyst designation. I have been managing... More
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  • Big Oil, More On Lawyers, Media Mergers, And Vacation Time-

    Last week the major integrated oil companies reported earnings for the second quarter of 2013, and all in all, the investment world was not pleased with their performances. First, people should understand that the largest oil companies in the world, Exxon, Shell, BP, and Chevron are dominant companies which generate large amounts of revenues, cash flow, and in absolute dollars, net profits. However, the costs for large integrated majors have been going up and are enormous. In order to explore for oil, both in the sea and on land, they have to pay millions for the licenses and the acreage to develop. Once they have the land or rights to sea areas, they have to lay out hundreds of millions of dollars to drill for the oil with rigs or sea platforms. Projects take years to develop, so the payback time can be extended. The chances of discovering oil are typically about one in every four wells that are drilled. One final potential problem is the volatility of oil prices. In this quarter, as oil prices retreated a bit, their profits were hurt some. Obviously, the way technology has developed the capabilities of seismic imaging and the use of sensors and nanotechnology, more precision in locating oil is constantly improving. Still, the largest problem for investors in the oil sector is the amount of capital expenditure which constantly needs to be made.

    Another problem for big oil is much of the new possible discovery is located in areas which are very dangerous, either weather wise or in politically unstable regions. Making things even more difficult for the majors is the high volume of oil that they deal with, and the expectations of Wall Street. The investment world is constantly concerned with growth. The big oil majors produce an average of anywhere from 2-5 millions of barrels of oil per day. In order to move the needle on those production numbers, the oil majors have to invest not hundreds of millions of dollars in new projects, but billions of dollars. Big oil is a high stakes game with major financial and political consequences as many countries depend on their oil revenue for nearly all of their budget revenues for a fiscal year. I would expect you will see a much sharper focus placed on developing existing acreage versus looking for new territories, especially if those areas are dangerous, in tough to access regions, or under the control of governments which might be considered questionable to deal with.

    In looking at the major's results, Exxon, BP, Shell, and Chevron all had results which were below what the market expected. Speaking specifically to BP and Shell, the former was hurt by a high tax rate and some tax lag on their investment in Rosneft and how Russian duties are calculated. Certainly, the fact they had to set aside a bit more money for the ongoing legal situation from the Macondo oil spill did not help either. Operationally, things went pretty much as expected as their upstream division performed well and their downstream (refining) was solid.

    Shell was disappointing because their investments in non conventional avenues for oil development, meaning shale and tight oil, proved very disappointing. Shell also withdrew their guidance for cash flow growth in the future. Shell is the second largest oil company in the world, and their announcement shows that regardless of how promising an area is, if you pay too much for land or access to development, there certainly is no guarantee you can recover the resources to make the return on investment worthwhile. This is the fundamental issue with the big oil companies right now, which is how much return will be realized based on the amount of capital spent. Shock of shock to anyone investing capital, but this is the same question one has to consider for any opportunity you might evaluate. I would expect Shell will return to the fundamentals of upstream exploration and refining to get those operational areas straightened out. Once they do so, they will then revisit the unconventional resource question, but probably with a heightened focus on return on investment. One final note on the big oil companies is they remain dominant in an industry which will be with us for quite a long time. In that light, Wall Street ignoring them, or even worse punishing them, might not be the wisest action. In fact, a few of the major are buying back their own shares. Hmm, what does that tell you?

    Regarding my own thoughts on lawyers, certainly what BP is having to deal with regarding the settlement with the Macondo Oil Spill has an affect on how I see things. It appears BP is now taking the step of either having a favorable ruling from the district court on how claims are processed, or they will opt out of the settlement. The trail lawyer profession is one where for many years, they have targeted any industry they can think of to extract massive damages. I am not saying enterprises are not responsible for industries when they make errors, and many families deserve compensation for injuries, illnesses, or even worse, loss of life of family members. What is at issue is the conduct of the trial lawyer profession in their various efforts in many different situations. One of the largest trial firms was Millberg-Weiss, which was investigated for all kinds of illegal activities and eventually had to be broken up. They are not the only class action law firm which has engaged in, what I will call, questionable ethical behavior.

    In the situation with BP, the company agreed to a class action settlement, has payed out $20 billion of claims, and when the claims administrator was switched, all of sudden law firms and other businesses have been getting paid out on claims which BP say have no merit because a different interpretation of revenues and expenses is being applied. Can you say, bait and switch? In fact, BP says over 50% of all the claims amounts have been going to law firms. The judge in the case is an ex head of a class action lawyers law firm. Can you believe he has always sided with the class action lawyers- what a shock. Now, BP will take a different tact and we will see what happens. (Full disclosure- I own BP, the firm Y H & C Investments owns BP and Shell for clients).

    The media space is really starting to heat up as far as possible merger and acquisition talk. If you read the cover story of Barron's this week (http://goo.gl/tkYWhG), the possibilities are literally endless. The companies who could be involved are the biggest providers of content and access in the world- Google, Amazon, Comcast, Apple, Netflix, Time Warner, Time Warner Cable, Yahoo, Facebook, etc.

    It has been a long summer, and it is time to vacation. You know I will be watching what goes on in the investment world, but now is a time for me to recharge the battery. If you have any comments, or thoughts on the blog, or any questions, please post them! I hope you enjoy your week.

    Y H &C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

    Disclosure: I am long BP, RDS.A, RDS.B, AAPL, TWC, TWX.

    Aug 04 3:51 PM | Link | Comment!
  • Thoughts On Earnings, Loyalty, And Lovely Lawyers!

    The earnings reports came in hot and heavy last week, with more of the same this week as media and energy companies will share their financial results with the investment world. It was certainly, shall we say, interesting, as definitive differences were revealed among high profile reports. Watching McDonald's slump and Starbucks soar based on different results brought a little pleasure to this observer as I have long noted where my loyalty (and investment dollars) are placed. Certainly, no victory laps are being taken as the market is a marathon and not a sprint. Looking at the results from Sirius, Amazon, Sandisk, Logitech, Build A Bear, and others makes me feel comfortable that placing high priority on a company's digital strategy will continue to be of primary importance in how I evaluate long term strategy in the capital allocation process.

    One of the noteworthy aspects of last week was how Amazon.com reported a down quarter, yet the stock did not sell off. In the business press, Amazon.com is always viewed as a different kind of company because it has such a premium valuation and yet many believe it's financial disclosure and transparency leave much to be desired. What many investors and the business press do not realize is that institutional investors are inclined to stick with companies which they have done well with. If you were an institution who bought Amazon.com 15 years ago when its valuation was anywhere from 500 million to a billion dollars, and it is now worth $140 billion, you are probably going to give Mr. Bezos and his management group plenty of latitude. One quarter of mediocre results is not going to cause their investor base to give up on them.

    This week we will hear from Exxon-Mobile, BP, and others about how the large integrated oil companies have been executing. One tangential aspect of the large oil companies I want to comment on is how the legal profession, if that is what you want to call it, sees fit to sue anything which they view as being fair game. Really, if a company is generating a large amount of cash, in any field, not just oil, lawyers believe it is fair game to go after (extract money from). As an investor, I have found ways to try and profit from the shall we say, aggressive practices of the different kinds of lawyers. Still, I think the legal system in the United States has become a travesty in terms of "justice" or "fairness." You will hear more from me on our legal system during the next blog post. Let's just say I am not a big fan of lawyers though I do have several who are friends.

    Mergers continue to heat up as the very low interest rate environment makes the risk reward ratio for aggressive expansion or consolidation far less costly. I continue to believe the smart money is borrowing and acquiring, and certainly not paying down debt. I am not saying take on an unmanageable amount of debt to buy an questionable asset or merge with a company where the growth and synergy opportunities are not clear. Still, I suspect nearly every industry is full of potential combinations where scale and getting rid of duplication can potentially make a great deal of sense.

    The U.S. medical system is the best in the world in all kinds of areas (drug discovery, biotechnology, genetic and genomic testing, just to name a few), but the costs of our medical care are still very high relative to GDP. Here is one example, and I am sure this does not include all factors so it is not a judgement, but it is an interesting (and eye opening) comparison of heart surgery cost-http://www.bloomberg.com/news/2013-07-28/heart-surgery-in-india-for-1-583-costs-106-385-in-u-s-.html

    I keep reading these kinds of articles about cash being king and wonder what Buffett would say. I do agree you need some just in case the market has a hiccup-http://www.bloomberg.com/news/2013-07-26/cash-is-trash-not-to-these-value-fund-managers.html

    These two guys have been great investors for a long time and now they are trying to produce more great stock pickers. Who says capitalism is not full of generous people? http://www.bloomberg.com/news/2013-07-29/gabelli-samberg-pledge-40-million-to-columbia-business-school.html

    Thank you for reading the blog this week. I hope you are having a good summer and if you have any comments, questions, or thoughts about the post, please share them!!!

    Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

    Disclosure: I am long SBUX, BBW.

    Jul 29 4:49 PM | Link | Comment!
  • Earnings Week, And People Eat With Their Eyes!

    Earnings season started last week as Google, Microsoft, Chipolte, and IBM, among others, reported their financial results for the most recently ended quarter. In looking at the most high profile companies, the one theme which is becoming more prominent is companies are not going to be rewarded for minimal growth. In most instances, profits are being looked at very closely to see if each enterprise is positioned to take advantage of long term trends, or not. The best example would be the divergence of how investors see Google versus how they perceive Microsoft.

    Google is seen as perfectly placed to take advantage of the long term trends of mobility, video, search, and innovation in high tech areas. Microsoft is viewed as being far too exposed to the slowly declining PC market. Google's results were impacted by a lower revenue per search figure because of the growth in mobile queries. Microsoft had to take a $900 million dollar charge against earnings because of the lack of sales in the tablet market with their first entrant, the Surface. Investor's gave Google the benefit of the doubt because of their market share with Android, and the strength of YouTube and search advertising. Microsoft still generates enormous profits, nearly $6 billion worth in 3 months, but their weakness in mobile and tablets is their Achilles heel until they prove otherwise.

    Today, McDonald's posted numbers which were weaker than the market expected. They also reported the rest of the year would be a struggle as well. I have long believed McDonald's, and the same can be said for Microsoft, are not innovative companies. Looking at the competitive environment and seeing how others create new products and then applying those concepts to your product portfolio is a very lazy approach to innovation. I believe that for many years, both Microsoft and McDonald's have employed this strategy, and now they have to live with the results. There are many other businesses who actually try to create new ideas, products, and services, and have them fail. In fact, in happens quite often. Still, let's not confuse genuine innovation with being attentive to your opposition's new product lines.

    Yahoo is a company which also reported earnings last week and the results were not highly thought of. Marissa Meyer is trying to overhaul the long sleeping internet content giant and has made quite a few moves which shows how a forward thinking management can try and reposition a business. The larger the enterprise, the longer it takes to transform all of the different aspects of an organization. Yahoo's stock has performed very well over the last year, and last week it jumped because of reports that Alibaba would get taken public relatively soon. Yahoo has a large position in Alibaba, which could come to the public markets at a $100 billion valuation. The efforts taken by management to change the marketing of their content, become a stronger player in mobile by acquiring Tumblr, and look for stronger relationships across the internet are reasons why investors are giving Yahoo the benefit of the doubt. In many cases, if people see the change in a company, they will buy in if they agree with the direction it is headed.

    Another aspect of business which I have been paying quite a bit of attention to is merchandising, or how a company displays its wares. Creating and developing great products is obviously crucial for any business, but how something appears to a buyer is in many cases the difference between generating revenue and having unsold inventory. My wife is a very good cook, but she really does a great job in showcasing her food. She has a saying, "People eat with their eyes." The same holds true with nearly any product. On the internet or on a mobile device, if something looks attractive, neat, clean, unique, fun, and interesting, chances are there is an opportunity for a sale. On the other hand, anything which is seen as yesterday's idea, old, tired, not relevant, or not pertinent, gets discarded instantly. Maybe, like, uh, PC's?

    The rest of the week will be interesting as Apple, Starbucks, and a whole host of other companies report their earnings. You can bet Wall Street, myself, and millions of other investors will be watching.

    If ever there was an elegant woman, the Duchess of Cambridge (Kate Middleton) has to be considered as graceful as anybody the public has ever come across. She gave birth today and I am sure that the UK is thrilled! http://www.bloomberg.com/news/2013-07-22/kate-gives-birth-to-boy-who-ll-be-third-in-line-to-u-k-throne.html

    Making animated films is not easy, although Disney certainly makes it look pretty simple. Dreamworks had disappointing results with their most recent effort-http://www.bloomberg.com/news/2013-07-22/dreamworks-declines-on-forecast-of-turbo-writedown.html

    Netflix is a company I certainly missed on and boy was it a big miss. I still believe they are going to run into trouble unless their efforts to develop original content probe successful. Here is a look at their most recent quarter and other efforts-http://techcrunch.com/2013/07/22/netflixs-original-content-plans-go-beyond-tv-shows-to-include-stand-up-comedy-and-documentaries/

    http://finance.yahoo.com/news/netflix-gains-630k-subscribers-2q-202338088.html

    Thank you for reading the most recent blog post! If you have any comments, thoughts, or questions about it, please share them!! Have a relaxing and enjoyable summer week!

    Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

    Jul 22 5:56 PM | Link | Comment!
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