Miss at F5 Networks

Among networking companies, F5 Networks has been a great performer delivering superior revenue growth and consistent margin. With its proprietary traffic management approach, it has competed successfully with the likes of Cisco in the application delivery controller market. However, last night it uncharacteristically pre-announced a large revenue and earnings shortfall.

NEW YORK (AP) -- Shares of F5 Networks Inc. tumbled before Friday's opening bell after the company cut its outlook for the January-March quarter, citing disappointing results from its North American business.

Seattle-based F5, which sells information technology and networking equipment and services, said telecommunications contract bookings dropped compared with the October-December quarter and the same period in 2012. Revenue from business with the federal government also fell.

The main culprit of the shortfall appears to be the company's North America business. The launching of multiple new products certainly lengthened the sales cycle and contributing to the miss. Not to be overlooked, the federal government business was also extremely weak. The market had essentially declared the sequester as a non-factor; however, as earnings season commences in earnest, we will find out if it is so. I will be very weary of companies with large exposure to the government vertical. 

 

Jobs Friday

News release from the Bureau of Labor Statistics showed US payrolls rose by only 88,000 in March and jobless rate declined slightly to 7.6%, compared to economists forecast of 200,000 additional payrolls and 7.7% unemployment rate. The ADP report on Wednesday had already foreshadowed a slowdown in the labor market; however, the magnitude of the this miss is still noteworthy even given the volatility of initial release of nonform payroll figures. Understandably, stock futures are trading off.

One interesting tidbits in the news release has to do with labor force participation.

The civilian labor force declined by 496,000 over the month, and the labor force participation rate decreased by 0.2 percentage point to 63.3 percent. The employment-population ratio, at 58.5 percent, changed little.

Hypothetically speaking, if labor force continues to decline, even with the subdued job creation, we may get to the magical 6.5% unemployment rate that Fed promised that they would cease the quantitative easing program. That may present an interesting dilemma for the Fed.

Waiting For Friday

At the beginning of each month, investors dutifully pay homage at the temple of ADP and Bureau of Labor Statistics. The fact that the Federal Reserve picked unemployment rate as one of  the conditions for ceasing its quantitative easing operation marks the importance of jobs report. Today, the just released ADP report as reported by CNBC showed job creation below expectation.

Private-sector job creation was considerably less than expected in March, indicating that the labor market's improvements could begin stalling.

A joint report Wednesday from ADP and Moody's Analytics showed 158,000 new positions, well below economist expectations of 200,000.   

The report serves as a precursor to Friday's nonfarm payrolls report, so the miss could cause economists to lower their projections.

"I'm very optimistic about the economy but I think the next six months are going to be pretty tricky and we're going to see that in the job market," Moody's economist Mark Zandi told CNBC. "So I think we actually will see weaker jobs numbers in the next few months."

Stocks are selling off modestly after the report. For the past few years, economic activities have followed a notable pattern of strength at the beginning of each year and only to taper off in the summer months. The performance of stock markets have also generally showed greater upward vigor at the ends of each year compared to the middle. The relatively weak showing of March employment figure as measured by ADP certainly invites speculation that such patterns are still holding. However, this modest pace of economic activities in fact have served stocks well as the timeline for Federal Reserve's easy money policies may yet be extended again.

Now, let's see what the official jobs report from the Bureau of Labor Statistics will bring this Friday.

The Value of Gold

A child of Zeus, neither moth, or rust devoureth it, but the mind of man is devoured by this supreme possession.
                                Pindar, 5th century BC Greek poet, describing gold.
 

After two decades of nearly continuous appreciation, the price of gold topped in August of 2011 at 1889.7 an ounce and have since retreated to the 1600 per ounce level. However, interest in the shining yellow remain high. Tuesday, on CNBC's "Future Now" program, RBC precious metal strategist spoke of the misconceptions of gold.

Gold is one of the most widely held financial assets - but that doesn't mean everyone understands the catalysts that drive gold higher or lower. On Tuesday's "Futures Now," RBC Precious Metals Strategist George Gero set out to clear two of the biggest misconceptions people have about gold.

Misconception One: If Gold Falls for a While, That Gives You a Good Chance to Buy It

This one sounds pretty obvious. Gold is worth a given amount, so if people keep selling it, than it will fall to a level at which it's a good value - right?

Well, not exactly. As Gero explains, "Asset managers look for performance - and performance has not been with gold." This explains why the major stock market rally has presented a serious headwind for gold. As stocks have seriously outperformed bullion, managers moved their money out of bullion and into what was working.  

That's why trends in the gold market can be far more important than any sense of inherent value - meaning that, paradoxically, falling gold prices are bad news for people who are looking to buy in.

Whatever merits or lack there of are in what the "expert" had to say, is not the object of this post. However, the assertion that professional asset managers who try to profit from changes in the value of gold had nothing better to go on other than the price of gold itself speaks loudly to the nature of the value of gold. Financial assets derive their value from actual and potential cash flow. Holding gold generates none. In this sense, gold doesn't even qualify as a financial asset. Gold is a good, much like food and shelter which derive their value from utilities. Gold serves primarily two functions, one as adornment and the other as media of exchange or money.

Gold is used as jewelry. The reasons are of course self evident. However, gold also serves its other purpose better than any material in the world. Gold is found on every continent, yet rare enough and hard enough to dislodge from the rocks that surround it to be valuable. Gold is inert, malleable and infinitely divisible. Other materials have been used as money throughout history, but none more universally recognized and successful as gold. So in gold, not only lies the perfect attributes of money, but also the brand equity of universal acknowledgement.

On this earth, there are two universal currencies, gold and the US dollar. Gold priced in US dollar has been stalled because the US dollar has been strengthening against other major earthly currencies such as the Euro and the Japanese Yen.

Who is Jeroen Dijsselbloem

Jeroen Dijsselbloem, a name investor better get used to, made news yesterday by saying the Cyprus bank recapitalization plan serves as a template for future Eurozone bank rescue plans.

(Reuters) - A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.

"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

 

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.

Later on, Mr. Dijsselbloem attempted to retract his statement by tweeting that Cyprus was merely a "specific case." One can only guess if his recantation was made after seeing markets trade off after his comment or because the template idea was only his own thought, not the consensus among European finance minsters. Arguable, Mr. Dijsselbloem's slip was much less damaging than his predecessor, Jean-Claude Juncker, who famously quipped,"when the going gets tough, you have to lie." However, Mr. Dijsselbloem must quickly learn that the markets hates surprises. If Cyprus were to serve as the template, then by all means let the market know and be prepared. If it is indeed a "specific case," those in charge must be adamant even if you are not so sure you can really guarantee such outcome.

Meanwhile, in the US, home prices are up and durable goods orders were robust. As the world burns, will the power of US consumers extinguish the flames abroad or will the US economy fall victim to world contagion? Many have offered guesses, but only time can tell.

Experts on Cyprus

Upon hearing the last minute deal for the re-capitalization plan for the two troubled Cyprus banks, a Reuters article optimistically declared,"Cyprus deal to bring US stock rally, experts say."

The last-ditch effort to save the banking system in Cyprus should bring a rally when U.S. stock markets open on Monday, according to several investment managers.  

Cyprus secured a 10 billion euro ($13 billion) package of rescue loans in tense, last-ditch negotiations early Monday, In return for the bailout, Cyprus' second-biggest bank, Laiki, will be restructured, and holders of deposits exceeding 100,000 euros will have to take losses.

It was unclear just how big of a hit big depositors will have to take, but the tax on deposits was expected to net several billion euros.

U.S. investors won't care too much about who takes losses in Cyprus, as long as there's a bailout that stops the run on banks in the Mediterranean island nation and keeps the eurozone stable, said Karyn Cavanaugh, market strategist at ING Investment Management in New York.

"If this works out, regardless of the terms, this is going to be good for the market," she said Sunday night.

Around 10:40 AM east coast time, as the market turned negative, another Reuters article delivered the not so optimistic news, "Stocks cut gains, Dow turns negative."

NEW YORK (Reuters) - Stocks cut their gains on Monday, with the Dow turning negative as initial optimism over a deal to keep Cyprus afloat faded.

What has been called a rescue package were in fact a recapitalization package. The aid from EU to Cyprus were to be used for fiscal control, not bank rescue. The banks were recapitalized with money seized from uninsured depositors. The new capitalization plan merely shifted the source of seizure from both insured and uninsured depositors to uninsured depositors alone. The new plan achieved the goal of protecting small depositors, but will not succeed in the objectives of maintaining Cyprus's business model of international destination for attractive Euro deposit and the capital flight from Cyprus banks for those depositors who are not forcibly tethered by capital control. The idea that depositors including insured depositors can be seized has been released. It can not be put back into the bottle again. Should the financial condition of another European peripheral nation take a turn for the worse, bank depositors will remember that speed means safety.

  

 

 

The Cyprus Breach

Stocks around the world reacted negatively to the proposal by Cyprus government to impose losses on depositor in order to bail out the two most troubled banks. Here is just one report from the Wall Street Journal:

U.S. stocks followed overseas markets lower as a Cyprus bank-deposit tax sparked renewed fears about Europe's debt crisis.

The Dow Jones Industrial Average was down 38 points, or 0.3%, to 14376 in midmorning trading. The Standard & Poor's 500-stock index dropped eight points, or 0.5%, to 1553 and the Nasdaq Composite Index shed 16 points, or 0.5%, to 3233.

The euro tumbled versus the dollar. The price of the 10-year U.S. Treasury note surged as investors sought haven assets, pushing the yield down to 1.949%. 

So far the US investors have acted more nonchalantly than their Asian counterparts where Nikkei closed down 2.7% and Shanghai was off by 1.7%.  We may casually dismiss the importance of Cypress as an economy, but the coherence of the world today owes more to ideas than machinery. When the government of Cypress acquiesced to the German demand that depositors pay part of the bail out, it breached an idea that the governments around the world have instilled within the financial world since the days of great depression. idea is bank deposits are absolutely safe.

The widespread adoption of fractional banking system has provided ample fuel for the modern economy. The strength of such system lies with its ability to increase money supply and provide additional capital for your hungry entrepreneurs. As the Greeks had noted long time ago, the strength of most things also tended to be their inherent flaw. In a fractional banking system, no bank can meet the demand of redemption if sufficient depositors demanded them simultaneously. This flaw proved fatal for a large number of banks during the great depression. Even since then, government deposit insurances have propped up in various forms to protect depositors during time of distress. After 75 years, the disease of run on the bank has virtually been wiped out. So we thought.

The Cyprus Breach has once again raised the specter of bank run. If the Cyprus levy was indeed implemented, what is to prevent the depositors from taking their money out after the pilferage on the vary rational thought that this may not be a one time deal? What is to prevent depositors from yanking their money out of Spanish or Italian banks on the possibility that such practice may eventually be applied to them as well?

The Euro is now at a crossroad. The German's desire to punish the irresponsible is certainly understandable. However, the choices before them is either to shoulder the entire responsibility of bailing out their less assiduous brethren or time to declare failure on the Euro experiment.

The Cyprus decision will be a big deal.