Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad streets in New York City, you're Inside The ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYSE and at ICE's 12 exchanges and six clearing houses around the world. And now welcome Inside The ICE House, here's your host, Josh King of Intercontinental Exchange.
Josh:
The first quarter of 2019 is now in the books, across corporate America sales leaders are taking stock of their numbers and reinforcing the goals they've set for the second quarter and the rest of the year. Are they where they need to be? Ahead or behind? At the same time, if that company is publicly held, the finance and accounting teams of those firms are pouring over the numbers readying for a conference call at the end of April, or sometime in May to report the results publicly and take any and all questions from investors. Sometimes people say that CEOs aren't accountable enough, but in these quarterly meetups, there's nowhere to hide from those who know their companies inside and out. The financial analysts whose job it is to maintain a model of how changes, large and small will affect a company's business performance quarter over quarter, year over a year. Billions of dollars of investment, hang in the balance, both from what the CEO says on those calls, and importantly how the analyst interprets it.
Josh:
Often the call starts before the market opens at 8:00 AM say, and a few hours later, the analyst's report is out poured over by the institutional money managers making buy and sell decisions based on how their model has changed. These analysts are expert in their field, they don't cover the whole landscape, some focus on the auto industry, others specialize in retail. Another analyst might have the key names in the oil sector.
Josh:
Rich Repetto of Sandler O'Neill & Partners is one of the leaders in the field, his research coverage includes the e-brokerage, execution venues and e-specialty finance sectors. On his watch are a dozen of the biggest names in this space, names like TD Ameritrade, SIBO Global Markets, CME Group, E-Trade, Interactive Brokers, NASDAQ, Virtu Financial, Charles Schwab, and of course, Intercontinental Exchange. At ICE's last quarterly call, after our executives finished their opening state, the operator queued up the questions and the first call, as it often does, went to Rich. Here's how it went.
Speaker 3:
The first question will come from Rich Repetto of Sandler O'Neill, please go ahead.
Rich:
Yeah. Good morning, Jeff. Good morning, Scott. I guess my question's going to be a broad question on some of the external sort of forces you're bumping into both in Europe and the U.S. And I guess in Europe when you look at Brexit, Jeff, you mentioned some of the benefits that people are needing to hedge more, but could you give us a recap of where do you think you stand on Brexit? There's this issue of tax on commodities potentially being forced by the EU. And then in the U.S. the external forces, these ideas of new competing exchange, as well as the scrutiny on data. Do you think that we've moved on be beyond that? Or what points would you highlight to investors in those areas?
Jeff:
Wow, welcome to my world, Rich. Basically asked me to describe my job.
Josh:
That was ICE's chairman and CEO, Jeff Sprecher. He replied, "Wow, welcome to my world, Rich. Basically you asked me to describe my job." And then Sprecher went on to answer Repetto, issue by issue in a discourse that spanned about 1300 words. Well, today, the questions are going in the other direction. We're going to go inside the world of Rich Repetto and the job of the modern financial analyst. That's right after this.
Speaker 6:
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Speaker 6:
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Josh:
Richard Repetto is a principal of Sandler O'Neill & Partners. He's the recipients of numerous accolades for his research, including analyst of the year by the Financial Times. After earning his degree in engineering from the U.S. Military Academy West Point at West Point, followed by an MBA in finance from the Wharton School at UPenn, his career brought him from Lehman Brothers where he established the firm's research coverage of the internet financial services sector to Putnam level, where he was a managing director and eventually to Sandler. At an industry meeting like the Futures Industry Association annual conference in Boca Raton, where Rich and I met a few weeks ago. Rich held court, just outside the official industries goings on. He and his colleagues hold meetings with management teams and grill them just like they would on a quarterly call. It's a great place to get all of the players together in one place and see them face to face. Rich, it's great to see you face to face. Welcome inside the ICE house.
Rich:
It's good to see you too, Josh.
Josh:
That question you asked Jeff on the call back on February 7th, you led with Brexit. It's a question you must ask most of the CEOs whose companies you cover. And yet it's such a moving target with new news coming daily out of London and Brussels. How do you factor the Brexit uncertainty into your models?
Rich:
It's pretty difficult right now and you try to get any extra insight from someone like Jeff who's spends a lot of time over there. He's got a lot of invested over there. So it's really like you said, been a moving target. It's a political thing that as things change, we have to stay flexible. We just trying to see how the company could get impacted by decisions the UK makes or the EU makes. It was a very open ended question about Brexit as well as the regulatory landscape here in the U.S. Jeff, I think took it with a little amusement in the beginning.
Josh:
You always try and get in there with a first call. Is that a strategy of yours to basically have an open field with which to run?
Rich:
I have questions in my mind and if someone asked it before me, I feel disappointed. So if I get up front at first, then I usually get the questions I want off, but it's been sort of a game with us we try to get in as early as we can and get what we think the questions on the issues that are most important to investors.
Josh:
On this side of the Atlantic, Rich, something that might disrupt a business model of analysts. You've got President Trump echoing the sentiments of some CEOs who'd rather report semiannually instead of quarterly. Let's hear from Joe Kernan and Andrew Ross Sorkin of CNBC reporting on one of the president's tweets from last summer.
Speaker 7:
In speaking with some of the world's top business leaders, I asked what it is that would make business jobs even better in the U.S., "Stop quarterly reporting and go to a six month system," this is him now, "That would allow greater flexibility and save money. I have asked the SEC to study." You know what that would mean?
Speaker 8:
This round tables so far behind...
Speaker 7:
Twice a year, we'd only have to do that. Sorkin, you're going to end up loving this guy. I'm telling you.
Speaker 9:
So I actually, I very much support this idea.
Speaker 8:
Business Roundtable is pushing this, this is a huge thing.
Speaker 9:
First of all, but Business Roundtable has been pushing no guidance or pushing guidance way.
Speaker 8:
But the overall strategy of long term thinking rather than short.
Speaker 9:
Look, I don't know about the six month idea. I'm very curious who he must have talked to in the past-
Speaker 7:
And the business leaders. Yeah.
Speaker 9:
About this particular topic.
Speaker 7:
That's very interesting.
Speaker 9:
That's a fascinating-
Speaker 8:
Elon Musk.
Speaker 9:
Fascinating tweet.
Josh:
Rich, the balance between allowing for more long term planning reporting only every six months versus keeping investors up to date on a quarterly basis.
Rich:
Yeah. I think there's some pros and cons to that issue. You do want investors to think long term and not get worried about the quarterly swings, but at the same time you want to have transparency. And I think that's very, very, a high priority for the investment community as well. If we had to wait six months in between getting a readout from the company on how well they were doing, there's definitely a drawback to that, so there's pros and cons. As an analyst, I want to see as much about the company's results as often as I can, but I do understand the other side of the aisle, which they spend a lot of time preparing for these quarterly calls. They would say, at least some, that it may detract from their long term planning.
Josh:
Knowing as much about a company's results, as often as you can. Take a step back, Rich about the role of the financial analyst, what do you consider your mission to be?
Rich:
My mission is to start from the ground up, know the company as well as possible, have a business model built out on the company so I can forecast how much this company's going to earn the next quarter, the next year, the next three years. At the same time, know the industry as well so I can put this all in perspective and know how outside forces could affect the company as well. Ultimately, I'm trying to advise advisors whether they should buy the stock or not. And to be able to do that, you need to know a lot about the company, a lot about the management team, a lot about the industry as well.
Josh:
What responsibility do you feel you have on your shoulders? You said advise investors about whether or not to buy the stock, bets of millions, perhaps billions of dollars of investment rest on the take that you have after one of these calls.
Rich:
Yeah. I don't try to think about how much rests on my take. I try to do the very best job I can. Absolutely, people, we're advising portfolio managers and analysts that have a lot of investment money behind them. Ultimately you're trying to work with the highest integrity and the highest credibility. So whatever we do, we're trying to be the best we can and be as honest as we can. So you just want to be as right as often as you can, but have people understand that you have a disciplined approach, you're doing it as honestly and with much as integrity so they can trust what you're saying, and you're not always going to get things right.
Josh:
They say about the president of the United States that originally the State of the Union was just a written message and it was just something the president could write and send up to Capitol Hill and put into the federal register. Today it is a presentation in person, face to face between the president and Congress looking at him. And in some ways on a quarterly basis, a company could just file a news release, put a quarterly report into the SEC and call it a day. When you listen to a CEO on a call versus what's written on paper, you're looking at a screen. What are you looking for? You've already have the numbers and the news release and many disclosures and appendices that a company provides, but there's a human element in tone of voice, confidence, things that only the ear can pick up.
Rich:
Absolutely. We can all read numbers. What you get is the background or any additional information is important, that's one. But you're absolutely right, the tone. A topic that's been in the media here, the frame of mind, is he confident about what he or she is talking about, are the other managers? How knowledgeable they are. So all of that goes into play and you only can get that from, I'd like to be face to face with them, but we don't have that luxury, but we at least get to hear them. And we get to ask our own questions, which again, I think is important and got to be balanced versus the other arguments that they make for a longer term.
Josh:
Another comparison to these White House news conferences in the East Room in the evenings when they're staged and they have a roadblock across all of the network time is, the president comes out and makes a lengthy opening statement and then finally gets to questions. Are you getting good information from the opening statement that a CEO makes reading what he or she prioritizes that the company is dealing with? Or do you say, "Yeah, yeah. This is their prepared remarks. I really want to get to how they're dealing with, not only my question, but the questions of my peers."?
Rich:
I think it depends on the company and how they decide to prepare for the conference call. The earnings release and the conference call, a lot of times they're very sharp and they predict or forecast what the questions are going to be. And they'll try to answer them upfront, that's helpful. If they don't, then we'll get to the questions ourselves. But I would say it varies by company. And I would say it also varies by quarter, whether they actually address the issues. They may not be attuned to what the investors or the analysts are specifically focused on, but that's what the Q&A period is for, if they don't address it though.
Josh:
Outside of the rhythm of the quarterly calls, Rich, there are times around the calendar, like FIA Boca, where we meet up and where you can see the leaders of the companies you cover face to face. How do these occasions differ from those calls? What's the benefit of you and colleagues leaving your offices in New York and going down to Florida to be able to assemble all these leaders in one place?
Rich:
Just like in any human interaction you can read it, you can talk it over the phone, which is the earnings call. And then you can be in person, when you get the full outside feedback of what... You can pick up body language, again, commitment, conviction. You also can get people when they're more relaxed and they'll give you more detail on different issues, but in a conference like that, as an analyst every morning, every day and every evening, we're trying to find out as much about these companies. So to have an opportunity to be with that many management teams in one location and interact with them, frankly, I get excited every year to go down to that conference.
Josh:
And it's not only those scheduled times in the room that you oversee, Rich. It's also, now I've been down to two FIA Boca, and there's a long narrow hallway where you can't help but bump into a lot of these people, or see who's conversing with whom. And maybe if you of that one CEO talking to another off in the corner, you say, "Could this be anything like 2007 when ICE made that unsolicited bid for CBOT?"
Rich:
Yeah. That particular conference has had some notable events while we're down there. But I would go back and just say to interact face to face in a, sometimes a more relaxed climate. I think we all have fun. They used to seeing not only me, but the other analysts every year, they're prepared for it. But you get to really know the personality, what type of person he or she is, that's leading the companies or that's driving the numbers. And you get to put a face behind all the voices and the texts that we see in writing. So a company is made up of human beings. The numbers are certainly going to drive a lot of the results, but it's good to know the people aspect as well. That's one of the few times you get to spend as much time with are so many people that are leaders of these different companies that I follow.
Josh:
And there are these times when, like that moment in 2007, the news breaks right in front of you. And so many people are going to wait for Rich Repetto's take, must put an enormous amount of pressure on you to gather as much information as you can, and really be the investigative journalist at that point, sharing what as quickly as you know it.
Rich:
Yeah. To be hands on right there at the location where that happened, where you could get to, very quickly, a number of the people to talk about and get feedback was a big advantage. I think the conference call and press release might have taken hours if not days to get compiled. So we were there, that event, I think that made history for the conference. Year after year, more people come down and that certainly was one of the early occurrences that sort of made its mark to make this conference a little bit notable in regards to the investment community, you don't want to miss it.
Josh:
So how many times have you been down now? At this point what's your rough count?
Rich:
Well, they give me a pin that's gold, so that represents 10 years plus. So I think I've lost track. So it's somewhere around, I think it's 13, 14 years.
Josh:
I mean, thinking about the span of those 13 or 14 years, Rich, you've now had some time to reflect on this year's gathering. How did the mood and activity you've observed in 2019 compare to prior years?
Rich:
This is a mature industry now, back in the early years there were investors that were just still trying to learn about the industry. You could teach them the basics of certain things of market structure. Now these investors are well versed and well knowledgeable. Their questions are a lot deeper, a lot more, I would say difficult to the management team. So it's a whole nother level now, because again, this is the exchange industry that's been public for 15 years and investors have gone up the learning curve in that 15 years dramatically.
Josh:
If you had to sort of narrow in on maybe the top three, what do you think the top three big issues are in the industry right now that are facing these companies?
Rich:
I would say on the top of the list right now is certainly the regulatory issue. We have regulators that are taking a strong stance and not particularly positive for the U.S. equity exchanges. So I think that was a constant question, constant topic and debate in the 15, 20 years I've followed these companies, this adversarial relationship between a regulator and exchanges have been unique to watch it, and observe it is still a little mind blowing to me right now. I think other questions are about always when you get that many companies together down there, you talk about M&A, that's mergers and acquisition. So you're always trying to see who could be a potential dance partner with another company. And again, this goes back to the days when ICE did the unsolicited offer to the CBOT when the CME already had an agreement with them.
Rich:
The third is volumes and trades are the most important revenue driver of most of these exchanges. So we're always trying to ask questions about the new products that could drive volumes to get the sentiment of what's the outlook. It's very difficult to predict. I wouldn't say a management team can do it perfectly always, but you definitely want to hear their outlook because they're seeing the companies that produce these volumes. They're a little bit closer than we are often. So it's good to hear what their sentiment and their feelings are towards what drives their revenue.
Josh:
So on these three issues that you think are the top issues, regulatory, M&A and volumes sometimes there's concrete news and numbers that come out, and sometimes there's wild rumor and speculation. And sometimes it'll happen right before the market opens and the share prices of these firms are going to react one way or another. How often will you jump in and try and quickly frame out what you might call a downside risk and let people know that, "Hey, there may be an overreaction here."?
Rich:
That happens quite often, because the market is fast and reacts quickly. We try to put a frame around it to say, "Here's what the absolute downside risk is," or, "Upside out performance could be." And if the stock prices sort of violate or go through those limits then we try to reign the market back in, so to speak or at least give them the numbers that we have. Analyzing company, at least as an analyst like this has a lot to do with speed and accuracy. So you're trying to do things fast and you're trying to do them accurately as well. And sometimes doing both is difficult, but you're trying to put boxes around, until you can get to that accurate and do you know what may take a day or two or a week of work, you want to try to say, "Hey, on the outside the far side, this is what the impact could be on the company's revenues up or down."
Rich:
And so it'll give some investors who may not be as close, because they're covering more companies than I am, or a particular analysts a little bit more confidence on how they're trading and why the stock is trading where it's at.
Josh:
You're a helicopter pilot. So give me a checklist, how does that unfold from the moment you see news to your word getting out?
Rich:
So the first thing is to make sure you see the news. So I have a associate that works for me and as well as the other salesman in the company, they see any news on any of the companies that I follow, they alert me. So the next is the first gut analysis, our gut check is, "Does this impact the company's earnings results, the numbers first?" If it does, then you're moving quickly. The third would be to do this framework that I talked about, where you're trying to get the outsized impact, unless you can accurately forecast it, which again sometimes could take hours or day or weeks.
Rich:
So then you're going to do the analysis as accurately as you can, and try to see how it impacts revenue expenses and ultimately earnings. And we have all kinds of ways we can try to speed that process up, we know exactly what a penny of earnings for each of the companies are. So if we say this is going to impact it by seven and a half million dollars of revenue, so drop right to the bottom line, we know two and a half cents is a penny. We don't have to figure out the taxes and the share count. We just say, "Hey, that's a 3 cent impact." And then we try to get out to the investors that are going to be most impacted by the stock.
Josh:
Just want to cover some tertiary issues as well that I've seen pop up on your radar over the last few weeks. Matt Leasing of Bloomberg just published a story, 'Wall Street Is Getting Cut Out of Bond Market It Long Dominated.' The story basically was about the electronic marketplaces for corporate bonds, a space Intercontinental Exchange know very well, indeed. You're quoted in the piece, Rich saying, "It's the model of tomorrow for fixed income trading, all to all represents significant advancement in automation in the market," break down what all to all means for the industry and what you're seeing in the marketplace.
Rich:
Yeah. So this is a theme that has been dominant over the last couple decades and that's electronic trading, where trading was once done either by voice or they call it open outcry in a pit on the exchanges. So the automation has almost always led to more volumes just because it's easier to press a button than it is to make a call, it's more efficient, it's cheaper to do. There's less cost involved. And again, the widget that the exchanges make is a trade, so it almost always results in more trades. So we're always watching and I laugh and I said, "I've made a career of watching trading go automated. And so has people like Jeff Sprecher, the chairman and CEO of ICE. So this all to all trading is trading that used to be done by the phone. This is, as I call it, one of the dinosaur asset classes it's called fixed income or bond trading. But the way bond trades work is they still call up, now there's a lot of money involved. They call up a dealer, an institution will call up their choice of two or three dealers.
Josh:
These are corporate bonds, municipal bonds, things that don't trade very much at all?
Rich:
Exactly. And that's why they do it because they don't trade often. So they're trying to locate who they can, if they're buying a bond who can sell it to them. And they'll go to the three dealers that they do business with normally. And this is one of the few times that trading has actually identified it, it's not anonymous, you're disclosed. So they'll get quotes from these three dealers for the bond that they're trying to sell and they'll sell it to probably the highest quote that they get. So that's all done over the phone. What the electronic promise is, that is done all electronically. They can announce that they want to buy a bond or sell a bond and the three dealers can still know who's selling the bond, but it also goes out to everyone else on the network and to them it's transparent.
Rich:
So instead of just having the opportunity to interact with the three dealers, you can interact with hundreds of other institutions as well as other dealers, as well as new liquidity providers. So the bottom line is, it's more efficient, you get more exposure. What people don't want is to move the market and be identified, but the trade sizes are small enough, but are growing, this still done its small enough sizes where just knowing there's someone out buying or selling at this size doesn't impact the price. The biggest thing is that you're right, these are bonds and it's not like trading Google or Amazon where it's easily and readable to find shares. You have to go out and really work hard to find the other side of trade in these because it's thousands of bonds.
Josh:
And you need the data and you need the analytics, the things that all of the companies are trying to put all in the right package. ICE is certainly trying to do it with ICE Bonds. And you've said that when something goes electronic, it trades more. So you've been watching this space for a long time. Do you see the volumes rising in the way that these companies are projecting?
Rich:
Yeah. It's slowly rising. A greater percentage is going electronic and volumes are rising. Now it hasn't hit the inflection point where, let's say the market in the United States for corporate high grade bonds is only in the low 20% electronic, so you really want to see that. At some point we think that could double and maybe even go a little bit higher. So you have to get enough players that feel comfortable with trading electronically, but we've seen it a lot of times in a lot of other asset classes. And like I jokingly say, made a career at watching markets go in this automated trading fashion.
Josh:
Talking about automation, Rich, we talk a lot about artificial intelligence on this show. The Wall Street Journal reported recently that robo-advisors are expanding into the cash management market with high rates. You noted that financial technology companies like Wealthfront are paying more on deposited cash so they can attract and retain investors money. How do you see that story unfolding from here?
Rich:
So just like many of the market or asset classes that have gone electronic. One of the behaviors that also is going electronic is the investment advisory industry and service. So now a machine can do that, for example, they call it tax loss harvesting, where you look to take certain losses to reduce your tax bill at the end of the year, a computer can certainly do that more efficiently than a human being. The goals of these companies are really fascinating. I take myself back to around 2000 when just the online stock trade was just coming about. They want to really take from getting paid electronically and deposited, to paying all your bills without having to click a mouse, put it into your savings and also plan for life events like buying a new house or putting a child through college.
Rich:
All this stuff can be planned and automated as much as possible through technology and AI. And that's where the world is going. How long it takes to get there, we'll see. Now the cash component, while everybody has cash. What the goal of these robo-advisors right now is just to get as much assets and many people involved with it as possible. So they don't want you leaving and taking your cash and going into some bank, that's going to offer you a big cash rate. So they want your assets and they want you to experience this money in motion, so to speak. It's more than just trading volumes that are going electronic.
Josh:
An analyst like yourself is a lot like a restaurant critic, Rich, you got to sample some of the product yourself. So you feel a certain responsibility to actually play around with these products and see how they actually perform, what's been in your experience?
Rich:
On the checklist of trying to figure out overall whether a product is good or not, that's high on the checklist is doing it yourself. Do you think that the adoption of a certain and product that it's simple enough or will apply to the masses well enough to really generate lots of revenue? On certain products like equity trading I can do it myself, I can test the product. It's more difficult if it's a stock exchange, I'm not quite up to trading on the floor or trading algorithmically, but whenever you can you want to try out the product yourself and get any, as I say, every opportunity to experience the interaction with the company or the product or its customers it all adds to the picture you get and your view of how well the company can do in the future.
Josh:
Picture of how well the company and the marketplace performs. Rich, we all remember how 2018 ended in December, the S&P swung up and down more than 1% on nine different days in December, a gyrating month dominated by uncertainty over the federal reserve and looming government shutdown rumors. Right after New Year, you appeared on CNBC to talk about the companies that benefit from more volatility, a sweet spot for the sector you cover. Let's pick up with Melissa Lee from CNBC.
Melissa:
Our next guest says, if you're worried about the surge in volatility, there is one sure fire way to make money. Let's bring in Rich Repetto principal at Sandler O'Neill. Rich, good to see you happy New Year to you.
Rich:
Hi Melissa.
Melissa:
So obviously you want to look for the companies that benefit from this surge in volatility.
Rich:
Exactly. Yes. So I cover the exchanges in trading companies, the higher the volatility, normally that correlates right with the volumes. And in fact, you see that the CME record volumes this year, CBOE record volumes and all the derivative volumes. And you also have trading companies that when you see this volatility, when they make money on the spread, the spread widens out.
Josh:
How does volatility, Rich, and as you say, the spread widening out, create opportunities for investors?
Rich:
Well, like I said in the interview, volatility is highly correlated to volume. The more the markets move, the more trading you see. Going back to my principle, the widgets that the companies that I follow make aren't cars and aren't product good, it's the trade and it's the volume. Because they're getting paid on each share, each contract that trades. So again, with higher volatility, normally there's higher volume. It's highly, highly correlated.
Rich:
The next thing that happens is when you see the markets moving around, the market makers that have to quote, have to have a bid and an ask on a certain stock or contract, they want to preserve their livelihoods, so they'll widen out their quotes. Now when they do widen out the quotes, what you can make, the spread is wider, but these market makers that do take risk and are making that spread, it's more. But there's also more risk that goes along with that in a market that's gyrating around like it did at the end of 2018.
Josh:
When we come back with Richard Repetto of Sandler O'Neill, the path that brought him from the battlefields of the U.S. Army to the battlefields of corporate America. That's right after this.
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Josh:
Back now with Rich Repetto, principal of Sandler O'Neill & Partners. When it comes to the question and answer session of a call with a CEO, Rich, how do you prep? Do you go in with a plan of what you're going to ask? Or make a game time reaction to what you're hearing?
Rich:
Well, I try to do as much prep as possible. I'll write down questions even the evening before that I'm curious about, or that I want to learn about or find out more information. So I'll have a list of a few questions already teed up. But also always seems to be new information that comes out once they release their earnings, some number or some issue that you hadn't prepared for. I ultimately try to ask the question that we think is the most impactful to the company's results and that investors most urgently want to hear about. Because once we go offline, a lot of management teams won't be able to express because of the disclosure rules, but while we're on that call, everything that they say is considered in a public domain so they're more apt to give you answers.
Josh:
Is this kind of work, Rich, what you thought you'd be doing after completing your service and following your graduation from UPenn Wharton School?
Rich:
Not exactly, but I think I did find my sweet spot so to speak. I majored in finance in my MBA so I definitely knew I wanted to get in finance. I didn't even know which functions there were in finance, but I think I was lucky enough to sort of end up in the position that suits my personality and my interests and sort of my skills. I like understanding companies, I like interacting with management. I also enjoy talking to investors and I like sort of the hunt to try to figure out the answer, the answer isn't always given to you right there on a silver plate.
Josh:
Well, that suits an engineer quite well, Rich. What brought you to West Point in the first place?
Rich:
Well, West Point, that's going back a little bit here now, but West Point was a quality education. There was that aspect of serving your country, there was patriotic aspect to it. I also get to play the sport that they semi recruited me for, which was hockey. So I think you combined all three going to such a, what I consider a prestigious institution, but also doing something for your country and having fun while you're doing it, playing the sport that I love. It fit my box.
Josh:
Do you still suit up in the senior leagues?
Rich:
No, I don't. I've retired the skates. I have skated a little bit over the last few years, but yeah, I've taken too many cuts and bruises and black and blue marks to keep doing that and still be an effective analyst.
Josh:
So you graduate from West Point, you get your wings as helicopter pilot. Tell me about your service.
Rich:
Yeah, so I served as each academy grad is required to, five years in active service. I wanted to do something that I thought I would enjoy and to me, flying a helicopter certainly met that requirement. And when you say something to do with the battle, I served as in the battle torn district of Savannah, Georgia for four and a half years, I had a great time in the military. I have still friends that I connect with, there's something about when you go through something like that with other individuals that it's a bond for life. So I think it taught me a lot about discipline and focus and it's helped me in the job I do today.
Josh:
What drew you to Wall Street when you left your service?
Rich:
Well, I wanted to do something that challenged my mind, challenged my academic skills, so to speak. So that's why I did go back to Wharton to get the MBA. And then I was immediately attracted, Wharton is a top school for finance. I fell in love with finance, I took every course that I could in finance, didn't take anything to do with operations or marketing. So I knew what I wanted to come up to New York and work in the financial area. I just didn't know exactly what job, in fact I didn't know what the jobs did either. But I was definitely motivated to try to work in finance here in New York City.
Josh:
All of us have memories I think of a certain age of the early heady days of the internet financial services sector. E-Trade coming online, the battles with Charles Schwab, TD Ameritrade, all these names that got their start just by blanket advertising and getting us all online and starting our own accounts. You begin coverage of it from Lehman. What are your memories of the beginning of those wild and crazy days?
Rich:
Yeah. What people may not know is that an analyst doesn't necessarily get to pick what group of companies or what industry he covers. It may be because you have some area of expertise that certainly helps, but a lot of times you get to work for someone and that's where you get your expertise. So I was lucky enough to work for a top ranked analysts in financials and credit cards. This was back in '98, '97. He was probably my biggest and still is a role model. So I saw these companies, they were interesting, it was the internet, they were exciting and they were groundbreaking. So he allowed me to pick up Ameritrade and E-Trade. And from there it was a fascination with electronic trading and trading in general. I think that actually, I think it helps if you're going to be an analyst. I think if you are committed or have some passion for the industry you're covering, that certainly helps the long hours to fly by.
Josh:
When you were named analyst of the year, by the Financial Times StarMine, Sandler O'Neil's Mark Fitzgibbon said, "I'm really proud of the great reputation and following Rich has developed for his coverage of the exchanges and broker dealers and particular emphasis on electronic trading." What's the key to developing the reputation and following in your space?
Rich:
Yeah, that's a great question. So it goes back to some of the things I said earlier, you're not always going to be right as an analyst. What I think sustains yourself is that you do with integrity, you're there consistently, your work ethic is hopefully unmatched or as strong as anyone. And then you develop these relationships and they trust you. They know that you've done the very best. And are you going to be wrong sometimes? You are. Every time you're coming out and you're coming out with the very best effort with it, strong integrity and over the years, knowledge of the industry and credibility. I think all that adds up to being able to have a place in the industry where people will do recognize you as an analyst.
Josh:
So as I think about that, Rich you're in one of the most stressful roles on Wall Street, how do you relieve the pressure?
Rich:
Well, for me, physical activity, I like to exercise and burn off some of the stress. Each individual person finds different ways to relieve that stress. My way has been through some physical activity.
Josh:
Mixed martial arts.
Rich:
Yes.
Josh:
What kind specifically, tell me about what you do?
Rich:
I do what is called Krav Maga, it's Israeli self defense. The location of, they call it the dojo, is right down from where I live. So I sort of bumped into it that way, but I had a fascination with this because of the people that were there. This was an art that was developed by people in the military, that's taught to people in the military and it's about self defense. You're out there to protect yourself in a dangerous situation. So that completely removes me from my day job when I do that for an hour, three times a week or so.
Josh:
Earning season is certainly the playoff season for you, Rich. Do you change your sleep or nutrition patterns getting ready for those long days?
Rich:
We do go long hours. I set up on my calendar, I know when earning season... The companies normally report in the same time period, just a different quarter. I don't plan any other activities. I know I'm going to miss my exercise, my Krav Maga. In typical days, we start at 6:30 in the office and then we'll go, if a company reports after the close, that can go till... And then we have to write our note after that. So that can go till nine, 10. And then again, you're back in at 6:30 in the morning to brief the sales people about what you garnered from the earnings called the evening before.
Rich:
So our typical earnings period go for three weeks, so it's three hard weeks and it's not every single day of that week, but it's usually at least two or three of the days in each of those three weeks. It's just something we got used to, my partner's getting used to. She understands that I'm not going to be around and not as available and probably not as-
Josh:
Happy.
Rich:
... Friendly and chipper during that period.
Josh:
So much of what you convey comes through your work as a writer, interspersing the numbers with analysis and word choice to make your important points. How do you approach the craft of writing as a financial analyst?
Rich:
So that's a great question. I wasn't a particularly strong writer, certainly not in college. The way I approach it is in financial writing, you have the numbers as sort of the bottom foundation and you build from there. We'll have numbers, we'll have a topic and then we'll try to explain a little story about what those numbers say. And I found out, or at least what I found that worked for me is that if you go back over it and you go back over it you can wean it down. And if you ever see any of the things that we write, we try to make a bold first sentence to get the point right across. And then we try to back it up the evidence or the data or the numbers that support it.
Rich:
I'll always go back at the end, before we push the button, because everything now is software and on the internet. And before I push the button to publish it or to get it approved to be published, I'll always go back and see, "What's the message here? Are we just putting out numbers that anybody can read or we are trying to take those numbers and sort of weave a story or some interpretation of what the numbers say?" And the more we can do that, to me, the more fun the job is.
Josh:
That bold first sentence at the top of your report, is that the headline that we see at the top of these reports?
Rich:
Yeah. That's the headline, but each paragraph we write a bold first sentence for each paragraph. Just trying to have again, what the idea that we're trying to get across, jump out at you before you even get to the numbers.
Josh:
Just like journalism, the headline can really sway a reader's opinion when they sort of click on that PDF of your report. Have you ever had CEOs or IROs sort of ping you back and say, "Rich, you really sort of zinged us with that headline."?
Rich:
Oh, absolutely. And you know what's interesting, is when you go, and I try to do this, but again, we're limited on amount of time when we're writing, I'm talking about. That you go back and you try to read the things from the aspect of the company you're reviewing. And a lot of times I'll go back and look at the tone, "Is this the tone?" Sometimes I'm trying to be critical. Sometimes I'm trying to be much more complimentary and I have to go back and just look at the whole body of work. When I look at the two or three pages to see whether that tone makes sense and it's coming through in what we're writing.
Josh:
There have been times in the past when financial analysts asked the question that a CEO really doesn't want to hear. We noted, Rich, in the past few weeks that former Enron's CEO, Jeff Skilling has been released after 12 years in prison. But back in 2001 before Enron imploded, analyst Richard Grubman probed him during one of Enron's calls. Let's hear a clip from the seminal documentary of the era, 'The Smartest Guys in the Room.'
Speaker 13:
In Skilling's public image, appeared in a conference call with analysts in April 2001.
Speaker 14:
And then Jeff Skilling took questions. And about midway through the session, there was a question and it was sort of aggressively wondering out loud why it was that Enron as a financial services company in effect, could not release a balance sheet with its earning statement like most financial institutions do.
Speaker 10:
You're the only financial institution that can't produce a balance sheet or a cash flow statement with their earnings.
Jeff Skilling:
Well, thank you very much, we appreciate it.
Speaker 10:
Appreciate it.
Jeff Skilling:
Asshole.
Speaker 14:
And then quite audibly, you could hear Skilling say, "Asshole."
Speaker 11:
And then he said, "Asshole."
Speaker 16:
As I understand, you called him an asshole.
Jeff Skilling:
If I could go back and redo things, I would not now have used the term that I used.
Josh:
So things can remain with you, Rich, just bad choice of words in a conference call.
Rich:
Absolutely, what you say is recorded, it gets typed in transcripts so it's in there for history. That's why I would say after doing this for a number of years that you want to push, you want to ask questions that are on everybody's mind that are pointed or something that's very insightful. You don't want to go over the edge. Now this particular case, I don't think he was over the edge. I think the answer was over the edge. You want to be aggressive, but understand where you're going and what you're asking because it is on tape, in writing and will live far after that call.
Josh:
Tesla CEO, Elon Musk found himself in hot water last year for telling an auto industry analyst, "Excuse me, next boring boneheaded questions are not cool." You've seen hundreds of these calls unfold, Rich. As a prime consumer of them you've talked about the way you'd behave towards CEOs, but what's your advice to CEOs to deal with heated questions?
Rich:
I think my best advice would be always to pause, to first understand the question and then don't let it get underneath your skin, be a little bit more impartial and then just give the best, factual, honest answer that you can. But if you let your emotions get the better of you, I don't think analysts are intentionally trying to do that, but they are trying to ask questions that dig deep and that try to uncover something that you may not want to talk about. But it could be important to investors. So I think you try to keep you cool and try to be objective and don't overreact because it's only a question.
Josh:
Such a unique role, Rich, the financial analyst and one that is changing. And we talked about it in Boca, the shifting winds of the equity research profession and how it will change in the future, including how it's paid for. Where do you see your profession headed from here?
Rich:
Certainly the way your customers pay you for research are likely to change. In Europe right now it's become, they call it research unbundled. Where people pay directly for the research and they have to pay for the research, they can't pay you through trading commissions. So that makes the identification or the value that you generate becomes a lot more transparent, I think a lot more clearer. So going forward, I think analysts that are good, that however way they can add value, whether it's through their industry knowledge, through their company knowledge, through their hard work, but if they can add value to investors in that industry, I still think they'll get compensated very well. But if you don't, I think the disparity is going to be wider than what it is now.
Josh:
What are some of the other issues facing your profession? Is there enough new blood coming in?
Rich:
Yeah, I think there is. I see young analysts that work at my firm. I still think it's a job that's exciting that to study companies, I don't see that waning, or that interest in younger people. The way they do it, I think is changing too, there's more technology. So it's not a stodgy lack of advanced technology industry or analysis. So I think it has enough aspects that will keep it attractive hopefully young, bright minds.
Josh:
So those young, bright minds, where do they come from? If you're a cadet at West Point in 2019 or a Wharton MBA student, what are the tools and disciplines you'd want to hone to eventually sit in your seat?
Rich:
You want to have reasonable writing skills. I said, mine weren't that great, but I certainly improved. You want to have good analytical skills as far as working with spreadsheets and models, because you're trying to basically create this company, the results in a spreadsheet. Then communication skills are important, I think that's probably one of the things that gets overlooked is that an analyst can be good. An analyst that can communicate with clients and also have relationships in the industry, that he can work to his favor. I think everybody has a different style, but I think that certainly helps. An analyst that has good leadership skills, willing to step out and say what's right or go a different way. I think that's particularly important. And that's definitely a quality that can make you successful.
Josh:
Well, Rich Repetto, we're at the beginning of the second quarter, 2009, and the next time you interact with the Intercontinental Exchange, you'll be back in your familiar seat, asking the questions instead of answering them. But we are greatly appreciative of the time you've taken to chat with us today inside the ICE house.
Rich:
Thank you, Josh.
Josh:
That's our conversation for this week. Our guest was Rich Repetto, principal of Sandler O'Neill & Partners. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you got a comment or a question, you'd like one of our experts to tackle on a future show, email us at [email protected] or tweeted us @icehousepodcast.
Josh:
Our show is produced by Pete Ash and Theresa DeLuca and Ian Wolf with production assistance from Ken Abel. I'm Josh king, your host signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE nor its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information and do not sponsor approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing here in constitution offered to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
