I’m thinking that coming off the Fed meeting last week, the last thing you need or want is to read the 80th-odd treatise on the recent rate hike, and another analyst pontificating on inflation, unemployment, the shape of the yield curve, etc. Quite simply, the recent increase to the Fed’s benchmark rate, coupled with Chairman Powell’s comments concerning the general state of the economy and key econometric indicators, appears to have confirmed a “the economy is strong, inflation is still subdued, and more rate hikes are coming” sentiment. No real surprises, but clearly market watchers will continue to monitor Fed actions and commentary for any signals that the economy may be overheating and/or that recessionary pressures are on the rise.
Instead, I thought I’d briefly touch on some sentiments shared by legendary investor Warren Buffet and heralded JP Morgan Chase CEO, Jamie Dimon. Both gentleman recently opined on the value (or lack thereof) in companies issuing quarterly earnings guidance. Bottom-line, their op-ed in the Wall Street Journal earlier this month, titled “Short-Termism is Harming the Economy”, called for companies to stop issuing quarterly earnings guidance. Succinctly, they both feel strongly that, among other things, it may inhibit innovation and long-term investment due to the pressures associated with meeting (or beating) quarterly earnings forecasts.
Candidly, while I agree that a longer-term, common sense-oriented approach to performance expectations and corporate governance is probably much healthier for the markets and business development in general, there still is a bit of discipline that I applaud in the process of tracking actual results versus investor expectations. However, I would agree that quite a bit of the quarter-to-quarter angst over results and the sometimes-resulting apoplexy associated with “missing” by a few pennies has never really made a lot of sense to me.
During my equity research years I assiduously built and tracked earnings forecasts for the multitude of bank stocks that I followed, because, quite simply, that is what I was paid to do. But since the universe of stocks were often smaller, less liquid community bank equities, the flexibility and rationale in explaining actual variances often gave me a lot of latitude to coherently discuss why someone may have seemingly “come up short” in a given quarter while hopefully (ideally) reinforcing that the long-term franchise value had in no way been materially altered. That wasn’t always a luxury I could enjoy with the larger-cap names, as often I was usually the 25th-or-so analyst covering the stock and neither my comments, nor recommendation, were likely to have much, if any, influence on the subsequent trading activity of the particular bank. Quite honestly, if an NBD, or an Old Kent, or a First of America ever stumbled in a given quarter, but it was clear that the underlying fundamentals and relative investment thesis supporting the stock was still very much intact, then any developing weakness in the near-term trading of the stock was typically met with a signal through our brokerage system to prudently take advantage of the pull-back. In a way, I guess, it clearly coincided with our firm’s and my personal long-term view of supporting the local banks, especially when the oft communicated investment rationale for the stock was essentially unchanged.
I don’t sense that the practice of quarterly earning guidance will be disappearing anytime soon, but I would be supportive of a longer-term horizon on expectations as it hopefully would provide an adequate framework for monitoring a company’s performance while also establishing some semblance of baseline expectations in order to hold management accountable for building (and not destroying) shareholder and franchise value. Coming out of the dot-com crash of the early 2000’s and underscored during the Financial Crisis/Great Recession later that decade, disclosure rules and requirements were dramatically altered to help, in part, assuage investor fears. I will always be a big fan of candid and constructive discourse about one’s operations, but I recognize that today those discussions are often distilled down to nondescript, guarded, generic commentary on the business in order not to violate any non-public parameters.
The fear and risk of inadvertently disseminating anything sensitive and/or confidential is real, but unfortunately has also served to inhibit the candor that once accompanied these conversations. There has always been a legal restriction (and hopefully an accompanying moral guideline) to refrain from trading on inside information. That is not what I am alluding to. Rather, it was the opportunity to potentially get some broad, contextual insight into the operations and future direction of a company that has been somewhat lost over the years.
One example does not address all, but I wonder if things would have worked out differently if someone like a Crestmark Bank had been a publicly-traded entity subject to many of the market influences associated with that designation? Founder, Chairman and CEO David Tull diligently built an attractive specialty finance-oriented operation without the glare of public ownership, and always seemed to focus on the long-term objectives and benefits of developing that franchise. That is not to say that discipline was non-existent in the operation. To the contrary, Tull and President Mick Goik were laser-focused on prudently adding value and monitoring key operating metrics. They were simply able to do so without seemingly agonizing over any quarterly “bumps in the night” if they were confident that franchise value had in no way been materially altered. Clearly a large part of the “comfort” in adhering to this long-term view of building the bank had to do with management and the board having significant personal ownership in the operation. This wasn’t a hobby; the operators were also the owners, with meaningful skin in the game. The end result, with Crestmark’s planned sale to Meta Financial, means the initial capital raise used to launch the bank back in September 1996 will have witnessed a 30+ multiple return on the original investment.
In a way, while an isolated case and by no means a definitive statement on the banking sector at large, the Crestmark example does seem to speak volumes to the sentiments expressed by Messrs. Buffett and Dimon: creative, innovative business development led by a management team unencumbered by the nuances and pressures of quarterly earnings expectations.
ProBank Austin brings a multitude of experience, expertise and market knowledge to the table for our clients, spanning broad geographic swaths of the banking industry across this country….and the strong desire to continue to deliver that insight and value-add to all of you in the future. Please do not hesitate to reach out to me and/or any of my colleagues if we can ever be of assistance as you take your organizations forward and assess the competitive landscape.
In closing, attached please find our monthly summary of Michigan’s financial institutions. Best wishes for a solid Q2, and a prosperous and successful 2018!CLICK FOR THE JUNE 2018 MICHIGAN BANK SUMMARY