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Tuesday, Dec 5, 2023


It’s too soon to state definitively that first quarter earnings will stay up, but some preliminary news from Prudential Securities Research seems to indicate a northward drift.

The big New York-based brokerage found that of 135 large cap companies reporting as of mid-April, average profits were up 7.7 percent in the first quarter, compared with a year earlier. That’s not too shabby.

The Prudential study being acknowledged, it’s worth remembering what we found when we poked our noses into last year’s third-quarter earnings: that whether earnings were “robust” or “flat” depended on what you read.

There were diametrically opposed headlines in The New York Times and the Wall Street Journal, one of which pronounced earnings were up sharply, and the other which said they were flat. It depends on the universe of stocks that is selected to measure earnings. Still, for now, things look good.

Meanwhile, Richard Hokenson, chief economist for Donaldson, Lufkin & Jenrette Securities Corp., continues to stick to his gloomy guns for the year 1997 as a whole.

You might remember he called for a recession this year, and a 40 percent drop in average earnings per share at a dinner hosted by DLJ late last year.

The first-quarter is in the bag, and no recession in sight.

In a mid-April report, an unrepentant Hokenson now says the contraction will begin in the second quarter, led by demographically inspired weakness in the consumer market (aging population loses interest in furnishings and gadgetry). He also says inflation will become deflation.

Printer is busy

They didn’t have enough room at their old Maple Street location near downtown Los Angeles, so Bowne Co., the nation’s largest financial printer, has moved its plant to Dominguez Hills, near Long Beach.

“We’ve tripled our floor space,” said John Jackson, regional vice president. “1996 was our best year ever.”

Bowne prints up prospectuses for public debt and equity offerings, and so their business is a direct reflection of the robustness of capital markets.

Bowne’s research department was kind enough to drum up some numbers for us on the Los Angeles and Southern California public capital markets scene.

In no particular order of importance:

– There were 141 initial public offerings of stock in Los Angeles County-based companies from Jan. 1, 1991, through this year’s first quarter. The offerings raised $5.59 billion.

– 1996 was the hottest year, with 38 IPOs, raising $1.67 billion.

– This year’s first quarter was pretty hot. There were seven IPOs, garnering $507 million. That’s the third-best quarter of the decade, beaten only by 1996’s two hottest quarters. The all-time record quarter was 1996’s fourth, which sported nine IPOs for a total $768 million raised.

Jackson points out that local companies make heavy use of public debt markets, secondary stock offerings (also called “follow-on offerings”) and preferred offerings.

Although there are fewer preferred stock offerings than IPOs over the 1991-1997 period, more money has been raised in preferred offerings $7.75 billion than in IPOs.

Meanwhile, those annoying Northern Californians continue to beat us at the IPO plate. In 1996, the Northerners raised $4.12 billion in 98 IPOs, while the South raised $2.85 billion in 69 IPOs, despite having the larger population and business base.

Southern California is defined as Santa Barbara to the south, excluding San Diego, but including the Inland Empire. Northern California is the greater Bay Area and Sacramento.

The data is remarkably consistent. In no year or quarter of the 1990s did Southern California raise more money for IPOs than Northern California.

Why the spread?

The north has a high-tech network of academics, venture capitalists and underwriters that is a virtual IPO machine. While the south is active, we have yet to develop the nucleus, or the network, to put a steady flow of IPOs into the pipeline.

Jackson said he expects 1997 not to be as hot as 1996, but he still believes that it could be a great year, and the fundamentals are still sound.

“We have low interest rates, low inflation, economic growth,” he said. “And Southern California is emerging from a prolonged recession.”

With irrational exuberance perhaps making a comeback, another IPO banner year may be with us.

Romanian IOUs

It is always a kick to talk to Mitch Julis, managing partner at Canyon Partners LP in Century City, an investment outfit. This guy would drink liquid plutonium if he thought the returns were high enough.

Those of you with lead-lined innards might want to try Julis’ latest idea: Romanian government bonds.

Inflation is running at 18 percent to 20 percent a quarter in Romania (as best as these things can be measured), and the bonds pay not in dollars, but in Romanian currency. That means exchange rate risk: Romanian currency could trade for less against the dollar in the future.

“The Romanian bonds pay about 140 percent a year, or, on quarterly basis, about 34.5 percent,” says Julis. “But the rate of inflation (in Romania), per quarter, is running almost 20 percent below that.”

The real rate of return, calculates Julis, is roughly 15 percent to 18 percent, every quarter.

The big upside chance: Romania, like so many other nations, is buckling under pressure from the international financial community, including the World Bank and the International Monetary Fund, to get their fiscal and central banking houses in order.

“The whole premise of the investment is that Romania complies with an IMF program, and that inflation will abate,” says Julis.

And then Julis will own Romanian government bonds that pay 140 percent a year in interest, an a low inflation-rate country.

For those who like to sleep at night (if only fitfully), Julis has a recommendation: Time-Warner Inc.

Julis thinks that cable, telecommunications and entertainment have all been hammered a bit too much of late, and that Time-Warner offers a play in cable, with an added bonus of a possible upswing on the “content” side (Time-Warner also being a programmer). “It’s kind of a chicken way to make a play in cable,” he said.

I asked Julis what he thought about inflation-indexed Treasury bills, but he didn’t answer.

Benjamin Mark Cole is senior reporter for the Los Angeles Business Journal and covers the investment community.

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