• JPMorgan Chase’s Mounting Legal Bills
    Posted by on January 6th, 2011 at 1:08 pm

    One sign that JPMorgan Chase (JPM) is doing well: Everyone’s trying to sue them. Bloomberg notes that a Madoff trustee is after them for $6.4 billion. Also, Lehman Brothers is on the warpath for $8.6 billion.

    So far this year, JPM has reported $5.2 billion in legal costs. The company had very good earnings for the third quarter, but it would have been even greater if they hadn’t had to set aside a big chunk of change for lawsuits.

    Linda Sandler picks out some interesting facts: In their latest 10-Q filing, the bank used the word “litigation” more than 50 times. The potential losses for JPM come to 13% of their book value. For Bank of America (BAC) the figure comes to 17%.

    Naturally, this is a big headache for banks. I’m sure JPM wouldn’t be sued if they weren’t so successful. The difficulty is how to value these suits. Obviously, the bank thinks most of these suits are bogus and therefore shouldn’t cost them a dime. Of course, that decision isn’t up to them; it’s up to the courts. Still, they need to disclose the potential costs however frivolous.

    JPM reports earnings one week from tomorrow. The consensus on the Street is for 98 cents per share. In my opinion, that’s laughably too low. I understand why analysts want to low-ball their estimates. Personally, I’d be surprised if JPM earns anything less than $1.10 per share.

    In other JPM news, Obama will name William Daley, one of the bank’s big shots, as his new Chief of Staff.

  • “Snowstorms do not destroy demand”
    Posted by on January 6th, 2011 at 10:29 am

    The Labor Department reported that initial unemployment claims rose by 18,000 last week to 409,000. The number for the week before was revised up by 3,000 to 391,000. Last week’s report got some attention because it dropped pretty sharply. This drop coupled with the very strong ADP report hints that tomorrow’s jobs reports will be strong.

    Why is this important for investors? The good news is that profit growth has been very strong lately. The problem is that the increase in profits has mostly been due to increased profit margins.

    For example, let’s look at Wal-Mart (WMT). For their fiscal year that ended in January 2010, their sales rose by less than 1% while their profits rose by 7%. For the first nine months of this year, sales were up by 3.8% while profits rose by 7.5%. Make no mistake, that’s good. The issue is that raising profit margins can’t continue forever. At some point, a company needs to grow its sales. More profits means more sales which means more jobs.

    We’re also getting sales reports from retailers and so far, they’re not so good.

    Some U.S. retailers’ sales fell short of analysts’ projections last month as a blizzard the day after Christmas kept shoppers from stores, overshadowing earlier holiday buying.

    Sales at stores open more than a year at Gap Inc., the largest U.S. apparel retailer, declined 3 percent, compared with the 2.4 percent average increase indicated by analyst estimates compiled by Retail Metrics Inc. Macy’s Inc., Target Corp. and American Eagle Outfitters Inc. also trailed projections.

    A Dec. 26 storm that dumped more than a foot of snow on parts of the U.S. Northeast “disrupted” post-holiday shopping, Macy’s Chief Executive Officer Terry Lundgren said in a statement. The day after Christmas is typically one of the busiest shopping days of the year. That may have pushed sales into January, according to Customer Growth Partners’ Craig Johnson.

    “Snowstorms do not destroy demand, they simply displace demand,” said Johnson, president of the New Canaan, Connecticut-based retail consulting firm. “Those gift cards don’t disappear, they get redeemed in January.”

    The Buy List is having another good day. Leucadia (LUK), Reynolds American (RAI) and Moog (MOG-A) are all at new 52-week highs. Ford (F) and Wright Express (WXS) are also close to new highs.

  • Morning News: January 6, 2010
    Posted by on January 6th, 2011 at 7:42 am

    Japanese Stocks Shine, Others Lag Before U.S. Payrolls

    Euro Depreciates on Regional Sovereign Debt, EU Bondholder Plan Concerns

    German Factory Orders Surged in November on Export Demand

    Standard Life Picks Barclays, BP to Lift U.K. Stocks in 2011

    Gold Drops for a Fourth Day as Stronger Dollar Curbs Demand From Investors

    ETF Scoreboard for 2010

    The 11 Slowest Growing Economies Of 2011

    Bonanza in TV Sales Fades Away

    Costco December Same-store Sales Rise 6%

    Goldman Unit Passed on Earlier Facebook Investment

    LinkedIn Plans a Stock Offering This Year

    Sorry But I Have To Say It

  • The Truth on Pink Sheet Stocks
    Posted by on January 5th, 2011 at 1:48 pm

    Every so often, I’m asked for my opinion on a stock trading on the Pink Sheet, or more formally, the OTC markets. Simply put, if a company is serious about its business, it’s not on the Pink Sheets. It’s on a real exchange.

    Here’s a study that looked at Pink Sheet returns from 2000 to 2008. A tiny few did well. The overwhelming majority did horribly. The median return was -97%.

  • How to Build a Cyclicals ETF
    Posted by on January 5th, 2011 at 11:28 am

    I write a lot about cyclical stocks and the Morgan Stanley Cyclical Index (^CYC). The market has richly rewarded this sector over the last several months.

    There is not, to my knowledge, an ETF that tracks the CYC. Fortunately, dear reader, you have me. And fortunately for me, I have Excel’s LINEST function.

    Here’s a quick-and-dirty way to build your own Cyclical ETF. All you need to do is buy four different sector ETF’s in these ratios:

    4.07 shares of Materials Sector (XLB)
    9.30 shares of Industrials Sector (XLI)
    7.33 shares of Consumer Discretionary Sector (XLY)
    3.93 shares of Energy Sector (XLE)

    The model isn’t a perfect match, but it’s not too bad.

  • ADP +297,000
    Posted by on January 5th, 2011 at 10:15 am

    I’m usually pretty skeptical of the ADP employment forecast but I should note that it came in very strong today. According to ADP, employers added 297,000 jobs last month which is the largest monthly increase in 10 years.

    The official employment report comes out on Friday. ADP does its own private sector forecast. Overall, ADP’s track record is pretty mixed.

    Over the previous six reports, ADP’s initial figures were closest to the Labor Department’s first estimate of private payrolls in July, when it understated the gain in jobs by 29,000. The estimate was least accurate in October, when it underestimated the employment gain by 116,000.

    ADP’s initial November estimate showed a 93,000 gain in private employment compared with the government’s estimate of a 50,000 increase. October payrolls rose 79,000. Projections among the 33 economists surveyed by Bloomberg for December ranged from gains of 50,000 to 150,000.

    “There is certainly a strong signal in the ADP data,” Joel Prakken, chairman of Macroeconomic Advisers LLC, which produces the figures with ADP, said in a conference call with reporters. “It has accelerated in each of the last three months and the gains that we reported this morning were widespread.”

    Jeff Cox at CNBC’s NetNet notes that not everyone is buying the ADP number. We’ll know more on Friday.

  • Mutual Funds: Worst Year Ever
    Posted by on January 5th, 2011 at 10:09 am

    Think you had a bad year? The mutual fund industry just finished its worst year ever in terms of relative performance. Only 20% of actively managed funds were able to beat the Russell 1000.

    By the end of November, a quarter of all funds were beating the index but it got even worse in December.

    Given that the December rally was led by low priced, small cap, less liquid companies that are inherently difficult for large cap managers to meaningfully overweight, performance was hard to come by – last month, the lowest priced companies which constitute about 10% of the benchmark, contributed almost 20% of its returns.

    (Via: Aleph Blog)

  • Morning News: January 5, 2011
    Posted by on January 5th, 2011 at 7:50 am

    Stock Futures Fall as Commodities Fall, Dollar Weighs

    European Stocks Are Little Changed as Fed Signals Continuation of Stimulus

    Treasuries Climb as Federal Reserve Prepares to Buy Long-Term Debt Today

    As High Gas Prices Loom, New Congress Faces Pressure on Drilling

    Energy Markets: Hedge Funds Raise Crude Bets to Four-Year High

    F.D.I.C. Seeks $2.5 Billion From Executives of Failed Banks

    China’s Yuan Weakens as U.S. Recovery Bolsters Dollar Demand

    World Food Prices Rise to Record on Sugar, Meat Costs

    U.S. Auto-Industry Recovery May Continue With 12.9 Million Sales in 2011

    US Bank Closes Buyout of Bank of America Securitization Unit

    Qualcomm Is Said to Be Set to Buy Atheros for $3.5 Billion

    What Are Tech Companies Saving For?

    Stock Twits Interview: Howard Lindzon with Mark Cuban

  • Today’s Fed Minutes
    Posted by on January 4th, 2011 at 3:52 pm

    The Federal Reserve released the minutes today from its December meeting. This was the first chance they had to evaluate how well QE2 was working.

    What I find fascinating about the Fed’s internal debate is how radically different it is from what we’re often told the Fed is thinking or doing. Instead of being the “root of all evil,” the Fed is actually worth listening to.

    David Berman notes:

    In the policy makers’ view, higher yields aren’t the result of a failed program, called quantitative easing. They are the result of an improving economy, in part at least. They explain:

    “In the weeks following the November meeting, yields on nominal Treasury securities increased significantly, as investors reportedly revised down their estimates of the ultimate size of the FOMC’s new asset-purchase program. Incoming economic data that were viewed, on balance, as favorable to the outlook and news of a tentative agreement between the Administration and some members of the Congress regarding a package of fiscal measures also reportedly contributed to the backup in yields.”

    I stand by what I wrote just before the November QE2 announcement:

    Investors need to understand that QE2 will have a major influence on their investments. The most important aspect is that quantitative easing will help fuel a demand for riskier assets.

    More specifically, quantitative easing will aid a shift toward growth stocks at the expense of bonds and value stocks. QE2 won’t affect the direction of the stock market, though that will remain strong, as much as it will alter the market’s internal leadership.

    Be careful of some of the commentary you see about the Federal Reserve. Some people just plain hate the Fed and are therefore blind to whatever the Fed does.

  • Motorola Splits in Two
    Posted by on January 4th, 2011 at 3:43 pm

    Nearly three years ago, Motorola announced plans to split itself in two. At the time, I said that instead of being one lousy company, Motorola would now be two lousy companies. That was a bit harsh.

    The split was delayed and delayed and pushed back. Today it finally came. Motorola is no more.

    One lesson for investors is to pay attention to when companies have spin-offs. Quite often, the less prominent company is a good buy.

    The two companies that Motorola has now become are Motorola Mobility (MMI) and Motorola Solutions (MSI). First, what’s the over/under on how long these guys keep “Motorola” in their name? Twelve months?

    The one to steer clear of is Motorola Mobility. I firmly expect these guys to be crushed to dust. Motorola Solutions, however, might be a compelling buy. They do the “everything else” part of Motorola’s business which is things like barcode scanners and two-way radios. I’m not recommending MSI just yet, but I certainly want to keep an eye on it. A lot of these businesses are slowing growth but are in well-protected industries.

    Just to give you an idea, in the last quarter, MSI had revenue of $1.9 billion while MMI had revenue of $2.9 billion. Despite having $1 billion less in sales, MSI had operating income of $321 million to MMI’s $3 million.