Value Investing News

* The New York Stock Exchange (shares of which trade as NYX on the New York Stock Exchange), which bought Euronext (the European stock exchange) last spring, reported 3Q07 earnings of $.97/ share versus $.43 per share in 3Q06. The results are mainly due to top-line (revenue) growth, as revenue went from $602M in 3Q06 to $1.2B in the current quarter. The article notes that a full quarter of this revenue was from derivatives trading. There are a few points of interest here:

o First, we are seeing continued M&A activity in the exchanges (recall that the NASDAQ was out hunting acquisitions a while back, taking a big stake in the London Stock Exchange, before admitting crushing defeat and selling that stake). Apparently there are economies of scale to be gained from merging one exchange into another. These economies of scale (lower costs associated with a larger scale operation) are likely due to the fact that the exchanges are trading electronic representations of assets on a software infrastructure. A particularly important line in the press release says, "operating expenses (defined as operating expenses, net of Section 31 fees, merger expenses, exit costs, liquidity payments, routing and clearing fees) decreased 8%." That sounds almost like the definition of economies of scale: merge and see your operating expenses go down. I can't help but wonder what those "liquidity payments" are, though.

o Second, a full 25% of the quarter's revenue came from derivatives trading. That reflects the continued appetite of various financial firms and brokerage houses for derivatives (instruments whose value is derived from price movements of another asset. A future BSJ may discuss them in more detail because they're like the Lindsay Lohan of the financial world - fascinating and dangerous). However, should these "financial weapons of mass destruction" (to quote Buffett) blow up in someone's face, this portion of revenue could take a big hit. Also, one wonders how much derivative action the NYSE has taken on for itself. Like a crack dealer who starts using his own product, no good could come of that.

o Finally, note that you can use NYX's financial reports as sort of the "pulse" of the financial world. For instance, it reports 88 new U.S. listings (15 IPOs), for $8.4B raised, versus $3.3B raised in 3Q07. There is also information on ETF listings and European listings. This is a little window through which you can view the state of the financial world: companies go public as close to the top of a cycle as they can in order to take advantage of exuberance and issues shares at a high price.

* Yahoo! Finance reports that the Department of Labor's employment numbers were a little better than the consensus estimates (aka "average guess by polled economists"). Payrolls grew, the unemployment rate stayed the same (4.7%), and hourly earnings didn't do anything scary. DoL numbers are important to Wall Street types because Uncle Ben over at the Federal Reserve takes them into account when making his rate decisions. Rapid increases in wages, for instance, might lead to inflation fears, while decreases might lead to concerns about decreases in consumer spending and recessions. The important point to take away is that there's always something to be worried about or to feel good about if you start looking at the monthly/ quarterly/ yearly numbers for anything. It's a dangerous trap.

* ConocoPhillips reported a while back that refining margins (the difference between the cost of the oil it takes in and the price for which it sells the refined product) were getting compressed and would hurt quarterly results. And, ExxonMobil fell apart yesterday on lower earnings for the same reason. Today, MarketWatch reports that Chevron's net income is down because - could it be? - refining margins weakened. What's happening is that the price of crude (what refiners take in) is going up (you can go over to the New York Mercantile Exchange and check various commodity futures), but refiners can't pass all of that along to consumers. I think the subtext is that, the last time refiners tried to pass on their costs (like all companies do), Congress called the CEOs in and slapped them around a little bit in front of the public. Much like a public whipping of old, this has altered behavior. It politicized the passing on of costs to consumers, which used to be (and still is in most industries) a normal business decision.