Oh my, how the times have changed. Jim Bianco shows how securities trading has changed since 2008 (check out the pictures)!

Jim Bianco of Bianco Research recently suggested that UBS' former trading floor be turned into an Arena football field.  What are some other ideas - roller derby, WNBA, Big East Lacrosse, beach volleyball, storage area for the Macy's Day balloons, etc.? Check out the pictures below...

• The Wall Street Journal – World’s Largest Trading Floor Put on the Block
  Firm is hired to sell mortgage of former UBS office complex in Connecticut; sale expected at cut rateFor sale cheap: the world’s largest trading floor.  The property was part of a lavish development in Stamford, Conn., in the 1990s designed to lure what was then Swiss Bank Corp. and thousands of workers away from New York.  Soaring 40 feet high, the trading floor was bigger than a football field, unimpeded by columns and soon filled with hundreds of stock, bond and currency traders.  Now the office complex and its once-iconic trading floor are both mostly empty and up for grabs.  CW Capital Asset Management, the servicer that controls the $149.4 million mortgage on the 712,000-square-foot complex near the Stamford train station, has hired Mission Capital Advisors to put the debt on the block, according to people familiar with the matter.

UBS Trading Floor in Stamford, CT (2008)

Former UBS Trading Floor (2016)

Marquette AIM Fixed Income Returns Exceed Benchmark Over Short- and Long-Term Holding Periods

AIM Students' Strategy of Short Duration Pays Off!

The shorter than benchmark duration strategy has finally paid off for the AIM Fixed Income Fund. For the past year the students who manage the AIM Fixed Income Fund have been short duration to the Bloomberg Barclays Aggregate Bond Index and recently this strategy has paid off - with short term and long term performance exceeding the benchmark (see table below).

The AIM students employ a top-down approach to managing the $500,000+ of Marquette endowment funds. Since interest rates have begun to rise, the AIM portfolio has generated strong performance. Additionally, even though employing ETFs to execute their strategy - the AIM students have exceeded the benchmark since inception in January 2006.

Portfolio Characteristics of the AIM International Equity Fund

Key Portfolio Characteristics of the AIM International Equity Fund as of 11/30/2016

(Benchmark: Russell Global Ex-US Index)

Click on any image to enlarge

Comment: Balanced style with tilt toward lower capitalization 

Comment: sector neutral

Comment: underweight Asia, but balanced emerging markets

Individual Holdings by Sector

Portfolio Characteristics of the AIM Small Cap Equity Fund

Key Portfolio Characteristics of the AIM Small Cap Equity Fund as of 11/30/2016

(Benchmark: Russell 2000 Index)

Click on any image to enlarge

Comment: Slight tilt toward growth and smaller capitalization 

Comment: AIM Fund remains sector neutral

Individual Holdings by Sector

Interesting chart on the difference in spending by Millennials (from Wells Fargo Economics Group)

The following paragraph and chart are from the Wells Fargo Economics Group, who provides domestic and international economic commentary. The AIM program has found the Wells Fargo analysis to be useful in understanding macro-economic trends across the US and globe. This report on Millennials was especially interesting and insightful in understand a significant secular shift in spending behavior. (Click on the chart for a larger view).

 

Mobile Millennials

The two fastest growing categories of consumer spending among Millennials (Ages 18-34) are food away from home and entertainment, underscoring the current nonmaterial nature of Millennial spending. There are some early signs however that this trend may be reversing as home ownership and transportation spending have begun to recover. It is difficult to say for certain how much of the overall trends in consumer spending by category is driven by pure demographic change and those driven by cyclical factors. That said, there is clear evidence of increased diversity of the Millennial generation relative to prior age demographics, which suggests, based on prior evidence, a structural change in the tastes and preferences of the population. 

A Current AIM Equity Holding: Farmer Brothers (FARM) by Patrick Wade. "Wake Up to Farmer Brothers"

Farmer Brothers (FARM, $34.25): “Brewing Up Something Good”

By: Patrick Wade, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

• Farmer Brothers (NASDAQ:FARM) is a national coffee roaster, wholesaler, and distributor of coffee, culinary products, tea, and other products. One hundred percent of their revenue is generated in the United States. Their primary customers are restaurants, grocery retailers, drugstore chains, convenience stores, and independent coffee houses.   

• Richard Farmer, a member of the founding family member, sent a letter to management, which outlined his support for the Company’s Board of Directors 

• All Three proxy advisory firms ISS, Glass Lewis, and Egan-Jones recommend that stockholders vote for the Farmer Brothers director nominees.

• Save Farmer Brothers delivered a letter to shareholders regarding a discrepancy in the qualifications of Christopher Mottern, the Director and Audit Committee Chair.

Key points: Richard Farmer sent Farmer Brothers a letter describing where he stands in regards to Farmer Brothers and the Save Famer Bros. Group. Being a member of the founding family, one would think he would support the Save Farmer Bros Group., however, he states in the letter that Save Farmer Bros. “does not represent all members of the Farmer family, nor does this group represent the views of most of the trusts for which Carol claims to speak.” 

Obviously, there is a strong misunderstanding in regards to the how many people actually support the Save Farmer Bros. Group. Richard then goes on to say how he fully supports the decisions made by Michael Keown and the entire management team. Richard Farmer currently owns approximately 16.77% of the shares outstanding.  

In addition to Richard Farmer’s support of the recommended director nominees, all three proxy advisory firms agreed with Farmer Brothers’ decision. Institutional Shareholder Services (ISS), Glass Lewis & Co., and Egan-Jones Proxy Services have suggested that stockholders vote for nominees on the GOLD proxy card. In all three of the statements, Michael Keown was mentioned directly as being the main driver behind the turnaround and the subsequent appreciation of the company’s stock. 

Since he’s been in office, the company’s stock has appreciated from $11.83 in 2012 to $34.10 in 2016. Concerning the Save Farmer Bros’ nominees, there was an overwhelming opinion that they lack relevant experience and their interests aren’t aligned with the majority of shareholder’s.

One interesting occurrence Save Farmer Bros. has going in their favor is a discrepancy found in the qualifications of Christopher Mottern, the Director and Audit Committee Chair. Mottern had that he is a certified public accountant listed in his qualifications, and after further review, Save Farmer Bros. found it to be untrue. 

They described the occurrence as being “deeply disturbing”, which seems to be incredibly dramatic seeing as though he’s had previous experience as a CEO, had leadership experience in the food service industry, and held his CPA designation for a period of time.  

What has the stock done lately?

Since the beginning of the year, the price of the stock has risen slowly by 5.42%. Farmer Brothers reported their Q1 2017 results on November 7, 2016, and they missed analyst estimates. The average estimate for EPS was 25 cents, and adjusted EPS came in at 21 cents per share. Additionally, revenue was expected to be $136.3 M, but it ended up being $130.5M. Because these weren’t material differences, there wasn’t a large market reaction.   

Past Year Performance: FARM has seen an increase of about 15.5% in the past year. Regardless of the aggressive price appreciation, FARM still has an upside of approximately 32.5%. Additionally, FARM had the largest amount of capital expenditures they’ve ever seen in the past year due to their headquarter relocation program. It’s expected to save FARM a lot in terms of expenses and increase their overall margins.   

Source: FactSet

My Takeaway

Although FARM missed their EPS and revenue expectations, I believe they will see a great amount of price appreciation in the coming periods. The fact that all three proxy firms supported the candidates on the Gold card means there will be a better chance of having an experienced management team. Additionally, there hasn’t been any changes in the drivers since FARM was originally pitched in October. 

The only changes have been a decrease in risk due to the Save Farmer Bros. group being shot down whenever they try to make an argument. In addition, the new facility will expand margins considerably leading to greater EPS. I believe all of these factors will lead Farmer Brothers into continued success for the coming periods.    

Follow the Link for the Marquette AIM Program 2016 Year-End Update

Happy New Year!

2016 was another successful year for Marquette's AIM program. The end-of-the-year newsletter is shown below. (If you want to view a pdf version, click here).

A current AIM International Fund holding: HSBC Holdings plc (HSBC, $41.94) by Nick Christman. "HSBC is the best European bulge-bracket bank play"

HSBC Holdings plc (HSBC, $41.94): “Own HSBC for a Steady Dividend and Global Banking Presence”

By: Nicholas Christman, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• HSBC Holdings plc (NYSE:HSBC) is the holding company for the HSBC Group. HSBC is an international financial services conglomerate, providing their services across 6,000 locations and 70 different countries. Their largest business line is their retail banking and wealth management (RBWM) division, which accounted for 43% of total revenue in 2015.

• Underlying business trends remain strong on an adj. basis with PBT up 7% in Q3 16’ YoY.

• Loss of $1.7B on sale of HSBC Brazil as CEO continues to exit unprofitable countries.

• Accounting change in recording stake of Bank of Communication, located in China, caused a $121B in RWAs and $5.6B reduction in capital improving their CET1 ratio 104bps.  

• HSBC is positioned to benefit from an increase in interest rates with their advances to deposits ratio at 68%. A 25bps parallel shift down in rates globally would cause a $2B loss in net interest income, thus highlighting the importance of rising rates.

Key points: HSBC like the other global investment banks has struggled to find consistent returns as the uncertain regulatory and political environment has taken away the historical advantage of economies of scale within banking. However, HSBC has protected capital much better than their European counterparts as their strong US and Asian franchises earned 54% of their total revenue in 2015.

HSBC has continued to take opportunistic and aggressive steps to bring their RWAs down to manageable levels under the Basel III capital adequacy framework. While unloading these assets have led to losses, HSBC has made progress much faster than their peer G-SIBs. As of the end of Q3 16’, HSBC had reduced RWAs $229B since the reductions began in Dec 14’, which is 82% of their total goal. Their CET1 ratio of 13.92% leads the peer average of 12.55% and gives HSBC significant opportunity to return capital to shareholders. As of Q3 16’, 59% of HSBC’s $2.5B buyback has been completed.

HSBC has been making significant improvements in their operating costs through multiple initiatives. One such cost cutting program has been cutting redundant branches (271 in Q3 16’) and enhancing digital capabilities through self-service banking. Another focus has been cutting unnecessary employees meanwhile improving IT infrastructure and re-engineering operations to make the company more efficient. 9M16 operating expenses fell $.8B to 22.3B vs. $23.1B 9M15 operating expenses.  

HSBC still must settle multiple outstanding lawsuits including the RMBS suit with the DoJ. The market will have more clarity on the expected penalty when other major European banks finally come to a settlement with the DoJ on their respective cases. HSBC’s underlying ROE for 9M16 has exceeded 8% thus showing their leading profitability from a competitive standpoint out of Europe. If HSBC can wind down one time charges and benefit from a better interest margin environment, the company should be able to drive strong returns into the foreseeable future.

What has the stock done lately?

HSBC has returned 4.71% in the last month outperforming the European financials ETF (EUFN) by 151bps. The stock jumped 4% on the day it reported earnings, as underlying adjusted PBT was 10% higher than expectations. The overall improvement in rates and steepening yield curve has brought the entire banking sector higher. HSBC trades at a lower P/TBV multiple than its US competitors at .89x vs. 1.31x US peer average, and could see potential upside if Asia and EM exposure drive additional revenues.

Past Year Performance: HSBC stock has risen 9.59% over the past year, rebounding nicely from the lows following the Brexit induced selloff. HSBC has a 6.14% dividend yield, and this can be expected to be paid out going forward based off the company’s strong capital ratios and underlying profitability trends. The stock has performed better than European peers because HSBC is much more geographically diversified. This will protect the stock from any one macroeconomic change within a given region.

 Source: FactSet

My Takeaway

Along with JPMorgan, HSBC has the highest CET1 capital buffer, which leaves solvency as one of the biggest strengths for the business. The ability to focus on profitable growth globally will put their business ahead of their competitors. HSBC could look to use their higher capital position to accumulate assets in Asia, which will be cheap as European peers scale back. This flexibility and growth potential makes  Therefore, it is recommended that the AIM International Equity Portfolio continue to hold HSBC despite the regulatory and political risks that the company faces. 

Source: FactSet