Brad Hintz, an analyst covering brokerage firms at Sanford Bernstein, appeared on Bloomberg Television’s “Surveillance Midday” with Tom Keene this afternoon to discuss Wall Street banks and what the year will look like. Hintz says his single best buy right now is CME Group Inc. (CME) and that “it is a monopoly that is going to do very well” and is “positioned to take to advantage of the economic recovery.”
Excerpts from the interview, courtesy of Bloomberg Television:
On Q1 for Wall Street banks:
“It has certainly been a good quarter for equity underwriting and M&A. The real question is on the trading side. Trading volumes look a little light. It will be a better quarter than Q4, but it will not be the booming fixed income quarter that perhaps we have seen typically the different Q4-Q1, you can have an 80% increase is the typical increase, and we are not going to get there.
On what will happen to brokerage firms:
“In 2005, you had equity analysts saying the end of fixed income was at hand. And it didn’t happen. What happened is we had a yield curve that twisted, and because it twisted, you had uncertainty about where you should put your bets as a fixed income portfolio manager, so you had money moving back and forth. That is how the Street makes its money. 1994, quite different. The Fed slams on the brakes. The yield curve rises and flattens, and when that occurred, everyone moves to the short end of the curve. There was no euro market at that point and so fixed income dropped off a cliff. I think the debate we’re having is this 2005 for the equity market’s going to overestimate the decline, or is this 1994? I do not think it is 1994. It strikes me that we will have a weakening fixed income environment in the coming years. We have two fixed income markets. It is really a function of what is going on in both of those markets simultaneously.”
On Citigroup (C), Goldman (GS) and JPMorgan (JPM):
“I’m comfortable in the sense of will Citi do well as the world economy comes out. They certainly should. They are positioned to take advantage of the most rapidly growing parts of the world economy. If we look at what has happened to Goldman, there’s a concern about their trading book. Not their M&A, not the equity underwriting. The issue is will trading ever be as profitable going forward. To a lesser extent, we can add JPMorgan to that because JPM was arguably one of the winners coming out of 2008-2009–is a company that is heavily reliant on fixed income on the trading side. Will trading be a much smaller business going forward? That is what you are seeing in terms of the relative performance.”
On his single best buy right now:
“Probably the CME.”
On the distinction between the CME and the New York Stock Exchange:
“If you buy a stock on the New York Stock Exchange, you can sell it anywhere else. As a result, stock market volumes move to wherever the liquidity is. If you lower your price in terms of the execution price, not the price you are getting on the stock, but the execution price and what you are paying to do that, volume comes to you. CME, if you buy a future, you have to sell it on the CME. As a result, if you are buying something on the CME, you are making a conscious commitment that there is liquidity at the back end. So the liquidity gets trapped. Market shares are trapped. They have 98% of the fixed-income futures volume in North America.”
On if the NYSE can compete with the CME once the deal with Deutsche Boerse is complete:
“Of course. The New York Stock Exchange has a competing product, a fixed income product in futures that is going to come out. The New York Stock Exchange has a twist on it. They say that if you go via us, you will be able to get a reduction in margin by about 30%. CME just came out with another approach to this. They said they would give a 60% reduction in margin, and the cost of that was their ratings. The S&P came out and put their ratings on a negative outlook.”
On the CME:
“That stock has a long way to run. Just to think about as the economy picks up, demand picks up in commodities, right? If there is worry about inflation, demand picks up in commodities. If there is volatility in the oil market, demand picks up in that. If you have a changing shape in the yield curve, you have to hedge duration changes. All that means more volume. That is the simplest business model.”
“The analogy we have made is that CME is more like Microsoft in its heyday. They could not acquire Apple. The CME could never acquire ICE. What acquisitions they will make can only be outside of United States because they do not want a justice department review. Unfortunately, given their excellent business model, they probably would not want to take an equity exchange. This just says stay in futures. It is a monopoly that is going to do very well. It is positioned to take to advantage of the economic recovery.”
On if 2011-2012 can be a great year for banks:
“Absolutely. As you know, I used to be a corporate treasurer. I would hate to be a corporate treasurer having to call 1-800-Jamie or 1-800-Bank of America. All my alternative sources of financing, unless I’m investment-grade credit, are gone. The regional banks are gone. Middle-market lending could be a very appropriate, attractive thing going forward.”
Hintz on retail brokers and Wall Street trying to limit movement of revenue producers:
“You can do anything you want. The issue is one of those Merrill brokers–he walks out the door, he will take about 70% of his client assets with him, and all he has to do is call Charles Schwab to go independent. If he doesn’t want to go there, all he has to do is call UBS or Morgan Stanley. There is a bid in the marketplace for the retail brokers. The client relationship belongs to the retail broker. It was strike me that Bank of America should be relatively careful about this because they could quickly turn themselves into a Payne Webber if they do it.”
“Right now, Bank of America still has 18 or 24 months left to go on the guarantees that were put in place. They will begin to roll off at that point. Brokers will remember that.”
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