• Earnings Season Kicks It Up a Notch
    Posted by on January 18th, 2011 at 10:25 am

    Today is when earnings season starts to get serious. Just this morning, we learned that Citigroup’s (C) earnings fell short of expectations (I’m not much of a Citi fan). On the plus side, both Charles Schwab (SCHW) and Comerica (CMA) beat expectations. Shares of Apple (AAPL) are down on Steve Jobs’ health news but they should recover, and hopefully so will Mr. Jobs.

    The Buy List is doing well so far today. Gilead Sciences (GILD) is particularly strong. I’m happy to see that AFLAC (AFL) is close to a new 52-week high. Friday was a difficult day for us. While the Buy List did gain for the day, we significantly lagged the market due to our exposure to the healthcare sector. For the day, we made 0.21% which was less than the S&P 500’s 0.74%.

    Over the weekend, the New York Times had a good and very thorough article on the challenges facing Johnson & Johnson (JNJ). Last year was a very difficult one for the company due to the multiple recalls. Fortunately, J&J’s business is very diversified so the overall business hasn’t suffered. Still, the dents to their image have taken a toll. The company is very aware of what’s happened and is working hard to improve its image.

  • Morning News: January 18, 2011
    Posted by on January 18th, 2011 at 7:55 am

    World Stocks at High, Euro Jumps on ZEW

    Shipping Costs in the Pacific Are Now Negative

    Germans Remain Wary Over Boosting Bailout

    ‘Explosive’ Food Prices the Biggest Risk

    Brent Oil Rises, International Energy Agency Sees Gradual Demand Increase

    Goldman Fails to See Hype That Derailed Facebook Sale

    Apple’s Cook Faces Product Development Challenge, Google

    Comerica to Buy Sterling Bancshares for $1 Billion

    U.S. Near Approving Comcast’s NBC Deal

    Delta Profit Misses Estimates as Costs Rise

    Citigroup Set to Post Fourth Quarterly Profit

    Blog Network Behind Lolcats And Other Memes Raises $30 Million

    Leigh Drogen: Stocks Meet Sports

  • Steve Jobs’ Liver Is Worth $22 Billion
    Posted by on January 17th, 2011 at 10:35 am

    Apple (AAPL) has announced that their CEO Steve Jobs is taking another leave of absence due to his health. I concur with Paul Kedrosky that the media cover of his health is ghoulish.

    Although our markets are closed today, Clusterstock reports that shares of AAPL are down 7% today. That translates to a loss of market value of $22 billion.

  • Morning News: January 17, 2011
    Posted by on January 17th, 2011 at 7:20 am

    Tokyo Shares End Mixed As Falling Asian Bourses Offset Weaker Yen

    Orphanides Says Bailout Fund Could Buy Bonds Instead of ECB

    Spanish Bond Yields Rise on Syndicated Sale

    Yuan Hong Kong Premium Widens on Supply Limits, Bond Sales: China Credit

    Egyptian Protester Sets Himself on Fire, And Stocks Dive, As The Tunisian Domino Tumbles

    Investors Crave More Strong Bank Results

    Crude Oil Slides as Alyeska Prepares to Start Trans Alaska Pipeline System

    OPEC Raises 2011 Forecast of Demand for Its Oil as Asian Consumption Grows

    Rosneft Deal Brings BP Trove of Untapped Reserves

    10,000th Sale Lifts Airbus Past Boeing in 2010

    J. Crew Said to Get No Offers to Rival $3 Billion TPG, Green Bid

    Howard Lindzon: The Semiconductor Train…MIPS, ATML, ARMH, CRUS with Roy Kaller

  • The Marshmallow Test
    Posted by on January 14th, 2011 at 4:15 pm

    Yep, it’s Friday. Enjoy.

  • Industrial Production +0.8%
    Posted by on January 14th, 2011 at 11:15 am

    More good economic news:

    Industrial production rose in December by the largest amount in five months, providing the economy with solid momentum heading into the new year.

    Activity at the nation’s factories, mines and utilities increased 0.8 percent last month, the Federal Reserve said Friday. Industrial production was up in every month but one in 2010.

    Overall industrial activity has risen 11 percent since hitting its recession low in June 2009. But it is still 6 percent below its peak reached in September 2007.

    Factory production, the biggest slice of industrial output, rose 0.4 percent, the sixth straight monthly increase. Makers of computers and electronic products, clothing and leather, chemicals and other products were among the industries seeing gains. But auto production dipped.

    “Manufacturing looks like it is doing its job and moving the economy ahead,” said John Silvia, chief economist at Wells Fargo.

    More V-like charts:

  • JPMorgan Earns $1.12 Per Share
    Posted by on January 14th, 2011 at 8:35 am

    Good quarter for Jamie & Co (JPM).

    JPMorgan Chase & Co., the second- biggest U.S. bank by assets, said profit rose 47 percent as the bank cut provisions for future credit-card and real-estate losses by $4.9 billion.

    Fourth-quarter net income climbed to $4.83 billion, or $1.12 a share, from $3.28 billion, or 74 cents, in the same period a year earlier and from $4.42 billion, or $1.01, in the third quarter, the New York-based company said today in a statement. The results compared with an average per-share estimate for adjusted earnings of $1 projected by 25 analysts surveyed by Bloomberg.

    Hey, every so often I get something right. I had been saying that I expected earnings of at least $1.10 per share.

    Let me explain something about banks’ earnings. There’s an odd future-present relationship within a bank’s earnings statement. A bank needs to set aside reserves for its bum loans. The problem is that a bank can only make a guess as to how many of its loans will be bad (or non-performing to keep in jargon).

    The bank can either guess too high or it can guess too low. If it knew exactly, it wouldn’t make the loans in the first place. The issue to note is that a guess made today about the future impacts what the bank reports today. When a bank sets aside more money for reserves, that’s money it can’t lend out. For a bank, that’s as critical as it would be for Walmart to take products off their shelves and put them back in the stock room.

    If a bank doesn’t set aside enough in reserves, it can be criticized for sacrificing quality for quantity. What’s happening with JPM is the opposite. JPM set aside too much for bank reserves. Since the economy is slowly improving, JPM isn’t draining bank reserves. Now it’s being criticized for artificially inflating its earnings. Bloomberg notes that 40% of JPM’s earnings for the first nine months of 2010 came from dipping into reserves.

    I really don’t get these criticisms. It’s just the nature of the game.

    JPM’s internal numbers look pretty solid. The fixed-income side is doing well, but it’s nothing outstanding. Profits from investment banking are down. For the quarter, revenue rose by 13%. Fixed-income was decent, but not great. The retail banking and credit card businesses are now in the black. Both divisions reported losses a year ago, hence the lower reserves for losses. Profits for mortgage banking are up 117% from last year. The WSJ notes that “Full-year compensation per employee in investment banking fell 2.4% for all to $369,651 from $378,599 in 2009.”

    There’s no dividend increase just yet for JPM. Dimon has said that he wants the dividend to be to between 75 cents and $1 per share. JPM still needs approval from the Fed, but by April, they might be able to raise their dividend.

  • Burton Malkiel on EMT and Index Funds
    Posted by on January 14th, 2011 at 8:30 am

  • The Financial Panic Was a Government Panic, Too
    Posted by on January 14th, 2011 at 8:03 am

    Here’s one of the questions from last year’s Bespoke roundtable followed by my answer:

    2) What do you believe are the most important lessons to be learned from the 08/09 financial crisis?

    When market participants panic, governments panic as well. Not a new lesson but a good example of an old one.

    Yesterday, the Inspector General’s office of the TARP (known as SIGTARP) released a fascinating report on the government’s action to prevent Citigroup from going under.

    Here are the official SIGTARP report and part of an article from the AP:

    The government’s $45 billion bailout of Citigroup met the goal of restoring the market’s confidence in the nation’s third-largest bank in the wake of the financial crisis and limited taxpayers’ risk, a new watchdog report says.

    The report was issued Thursday by the office of Neil Barofsky, the special inspector general for the $700 billion bailout of the financial industry and automakers. It found, however, that the government’s decision to aid Citigroup in the fall of 2008 wasn’t made coherently, and seemed to be based on “gut instinct” and “fear of the unknown” rather than objective criteria.

    Also, the report says that by bailing out Citigroup, the government encouraged high-risk behavior by signaling that big financial institutions would be protected from failing.

    The report makes it clear that Citigroup was very close to going under. The government pushed for a management shake-up that didn’t come…and has never come.

    I think this report severely undermines two of the current narratives. One is the conspiratorial narrative: that the government and the bankers knew exactly what they were doing. They didn’t. They made up their plans as they went along. The report criticizes that “strikingly ad hoc” nature of the process.

    The other isn’t a narrative but is the belief that government can serve as a rational actor to prevent the irrational exuberance of the private sector. In reality, the government was just as clueless as everyone else was.

    Ultimately, the government got lucky. Taxpayers made a nice $12 billion profit but the public’s investment in Citi was hardly a sober-minded affair.

    My guess, and it’s just a guess, is that the genius of the TARP program wasn’t that it bought preferred shares but that instead, it bought time. Shares of Citi didn’t bottom out until the following March. I think the key is that the TED spread gradually compressed which took some pressure off of Citi and other banks. Next time we may not be so lucky.

  • CWS Market Review – January 14, 2011
    Posted by on January 14th, 2011 at 7:37 am

    Fourth-quarter earnings season has begun! This morning, our first Buy List stock reported earnings. As I said before, I expected JPMorgan Chase ($JPM) to soundly beat expectations and that’s exactly what happened.

    The bank earned $1.12 per share. Wall Street was expecting 99 cents per share. JPM has been greatly helped in recent quarters by having smaller reserves for its loan losses. I was really impressed to see turnarounds in JPM’s credit card and retail banking divisions. Both divisions were money-losers a year ago. The improving economy is definitely helping their bottom line and this is why they have smaller loan reserves.

    JPM still needs to get approval from the Fed to raise their dividend, but I think an increase is coming soon. Jamie Dimon has said that he’d like to pay out between 75 cents and $1 per share. My guess is that we can expect to see a dividend increase by April.

    As I write this, the stock is up about 1.5% for the day. Shares of JPMorgan Chase are an excellent buy up to $47 per share.

    I sent you an email earlier this week to highlight the good news from Stryker ($SYK) and Nicholas Financial ($NICK). I’m happy to see that Stryker is still holding above $57.50. The stock popped above $58 earlier this week on its strong guidance. Nicholas Financial is also finding a new home between $11.50 and $12 per share. Both stocks are excellent buys.

    We also had more good economic news today. The Federal Reserve reported that industrial production rose by 0.8% in December. That’s the biggest increase in five months. On top of that, the increase for November was revised up to 0.3%. I think this explains much of the strength we’ve seen in cyclical stocks. Ford Motor (F), for example, is already a 10% winner for us this year.

    A few of our other stocks are doing well for us. Both Leucadia ($LUK) and Fiserv ($FISV) hit new 52-week highs today.

    There’s not much else to say so I’ll keep it brief. The market has been very good to investors in high-quality shares. Through Thursday, the Buy List was up 3.89% for the year compared with 2.08% for the S&P 500.

    This is an oddly perfect investing moment for us. Volatility has plunged. The S&P 500 has stayed above its 10-day moving average for six-straight weeks. That’s one of the longest runs in history. This won’t last forever, so I encourage investors to play it safe and focus on the high-quality names on the Buy List. Stocks like AFLAC ($AFL), Wright Express ($WXS), Gilead ($GILD) and Reynolds American ($RAI) continue to look very strong.

    Volatility will probably pick up as more earnings are released. I don’t yet know the dates for most of our Buy List companies’ earnings reports, but the reports will likely begin the week after next. I’ll have complete coverage on the blog.

    Remember that even strong stocks can fall after strong earnings announcements so please be well-diversified.

    That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy