Jack sharke's List: investing thoughts

• Core processing is the nuts-and-bolts system that banks need to maintain their deposit and loan accounts and to post daily transactions.
• Core processing is a very stable, almost annuitylike, business that churns out a reliable amount of free cash flow, and we think a moat surrounds these businesses due to the high switching costs involved.
• Because the vast majority of revenue is recurring under long-term contracts and relates to systems that are necessary for the bank to remain in operation, the core processors have felt little impact from the unprecedented stress their bank customers have faced throughout the financial crisis.
• While the core processors may not have lost revenue, it's been difficult for them to grow, as struggling banks have been deferring new technology purchases while they attempt to put their own houses back in order.
• As banks stabilize and take a harder look at their cost structures, we think there could be an incremental increase in their willingness to outsource, both to reduce costs and to make their cost structures more flexible. Core processors typically tie their pricing to the size of the institution, so their growth over long periods tends to track the growth in bank deposits, which have grown at a 6% compound annual growth rate over the last fifteen years.
• we think these companies are worth keeping on your radar as they could be a relatively safe way to play any further uncertainty in the banking industry.

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• Futures trading is a zero-sum game. For each trade there is a winner and a loser.
• Many companies and professional fund managers use futures to hedge their other positions. They are using their futures contract to reduce the risk of their portfolio. This could be the jet fuel prices for an airline or gold produced by a mining company who wants to fix in a specific sale price.