Maxine Waters on Foreclosures
Posted by Eddy Elfenbein on October 13th, 2010 at 11:59 am

Joe picks up on some off-camera laughter at around the 1:43 mark.

Apple Breaks $300
Posted by Eddy Elfenbein on October 13th, 2010 at 9:45 am

I’m beginning to think that Apple (AAPL) at $6.36 was a good buy in April 2003.

JPMorgan Chase Earns $1.01 Per Share
Posted by Eddy Elfenbein on October 13th, 2010 at 9:01 am

My earnings-dar has been fairly well-adjusted this week. For Intel, I said “I expect 50 or 51 cents, maybe 52 cents.” Intel earned 52 cents per share.

I also wrote, “The stock that I think is a good candidate for an earnings beat is JPMorgan Chase (JPM).” This morning, JPM reported Q3 earnings of $1.01 per share. Wall Street was expecting 90 cents per share.

I have to explain something about how banks report their earnings because it’s a tricky topic. When a bank reports its earnings, it needs to estimate now how many of its loans will turn out to be bum loans down the road.

Obviously, a bank hopes all of its loans will be repaid, but we know that a small amount will disappear into the ether. But how many? That’s not so easy to say. If the bank thought the loan would go bust, they never would have made it in the first place. But for sake of accounting, they need to set aside some money for their bum loans.

This means that the bank’s estimate of its future bad loans has a major impact in the here and now in the form of its current earnings. The whole thing is based on a guess, really. It can be a good guess or it can be a bad guess, but it’s only a guess.

So whenever a bank releases its earnings report, there’s always a debate about the quality of its earnings versus the quantity of its earnings. “Sure,” the bears grumble, “that’s what they tell us they earned, but the bank is living in La-La Land if they think those forecasts will hold.” Sometimes they’re right (see ZeroHedge for a critical look at JPM’s earnings). However, banks have no incentive to lie or mislead investors about their bad loans. It will only come back to bite them in the end.

Our own Nicholas Financial (NICK) is a good example of the opposite. They overestimated their bad loans and for the past few quarters had to play catch up with their loan reserves. This made it appear that earnings were improving more rapidly then they were. (This was a very small effect though.) Your guess is never going to be 100% spot-on so you always need to make adjustments.

Now back to JPMorgan Chase. Here’s the WSJ:

The nation’s second largest bank by assets reported $300 billion in new and renewed credit and capital raises in the quarter, and it said consumers spent more on their credit cards. But consumers and businesses continue to pay off loans faster than the bank makes new ones, and Wall Street’s wobble over the summer reduced revenue and profits from the securities business.

Still, J.P. Morgan’s $4.4 billion in third-quarter profits, $1.01 per share, topped analysts’ estimates, as the amount of money it set aside for loans that might go bad continued to tumbled. The bank also continued to report a declining defaults across most of its loan books.

Revenue on a managed basis, which excludes the impact of credit-card securitizations and is on a tax-equivalent basis, dropped 15% to $24.34 billion.

The bank did expand; assets increased 5% from a year ago to $2.1 trillion, mainly because it added securities to its investment portfolio.

J.P. Morgan’s shares rose 1% to $40.80 premarket amid broad market strength, pulling along rising shares of its main big bank rivals Bank of America Corp. and Wells Fargo & Co. As of Tuesday’s close, the stock had fallen 12% the past year.

The profit “was the result of the good underlying performance of our businesses,” Chairman and Chief Executive James Dimon said in a press release.

He noted that the investment banking’s results were “solid” and its Main Street operations saw “strong” mortgage loan production.

Still, the investment-banking arm saw profit drop by one-third as revenue slid 29%. Profit soared to $907 million from $7 million a year earlier on sharply lower credit-loss provisions at its retail financial-services segment as revenue declined 7%.

The first big bank reporting results, J.P. Morgan’s bottom-line had been solidly tied to its Wall Street-related operations recently, but growth shifted toward the giant bank’s Main Street operations in the second quarter as the economy continued healing. Investment-banking results have turned sour in recent quarters amid a steep decline in trading activity.

The bank also has benefited recently from a sharp cut in its loan-loss reserves. Managed credit-loss provisions were $3.22 billion, down from $9.8 billion a year earlier and $3.36 billion in the prior quarter.

Analysts polled by Thomson Reuters had forecast earnings of 90 cents a share on $24.64 billion in revenue.

Looking at Financial Sector Dividends
Posted by Eddy Elfenbein on October 13th, 2010 at 8:04 am

Higher dividends are a major theme this year for investors. This is a welcomed change from 2008 and 2009 when huge numbers of firms cut back on their payouts.

This is especially true for the financial services sector. Thanks to TARP restrictions (and bombed-out cash flows), many firms slashed their quarterly dividends to the bone — some even to one penny per share. To give you an example of how dramatic this has been, the Financial Sector ETF (XLF) paid out 26 cents per share for Q4 2007. Recently, it’s paid out three cents per quarter.

At some point soon, we’re going to see much higher dividends from financial stocks. Below is a list of 32 major financial stocks. I’ve listed each stock’s peak quarterly dividend before the crisis, the current dividend, and what I feel is their dividend potential for next year.

When I say “dividend potential,” I don’t mean this as a prediction. In fact, I doubt many firms will be willing to raise their dividends so dramatically. (For example, I doubt Goldman Sachs will do much of anything.) Consider my estimate to be at the high end. But I do believe it’s what they could do if they wanted. I’ve also added what the yield is based on my estimate of each stock’s dividend potential.

Morning News: October 13, 2010
Posted by Eddy Elfenbein on October 13th, 2010 at 7:57 am

BEFORE THE BELL: US Stock Futures Higher On Strong Intel Data

Inflation to Fall Short of Fed’s Goal Through 2012, Survey Says

JPMorgan Net Rises 23% on Lower Credit Costs, Beats Estimates

China Foreign-Exchange Reserves Jump to $2.65 Trillion

Standard Chartered to Raise About $5.2 Billion in Rights Offer

Across the U.S., Long Recovery Looks Like Recession

Geithner Sees “No Risk” of Currency War

Standard Chartered to Raise $5.2B in Rights Issue

Chinese Exports Continue Surge in September

Rising Corn Prices Bring Fears of an Upswing in Food Costs

Ritholtz Vs. Olick
Posted by Eddy Elfenbein on October 12th, 2010 at 4:41 pm

Here’s Diana Olick’s article from today: Foreclosure Fraud: It’s Worse Than You Think

Intel’s Q3 Earnings: 52 Cents Per Share
Posted by Eddy Elfenbein on October 12th, 2010 at 4:16 pm

After the bell, Intel (INTC) reported Q3 earnings of 52 cents per share. The Street’s consensus was 50 cents per share.

That’s pretty close to what I was expecting. Earlier, I had said that I wasn’t expecting anything great from Intel this time around, unlike three months ago.

The shares have rallied over the past few days. Three months ago, Intel stunned the Street when it reported earnings of 51 cents per share, eight cents more than expectations. But in August, the company lowered its sales forecast to $11 billion, plus or minus $200 million, which is why I was so eager to see what today’s results were. For Q3, sales came in at $11.1 billion. For Q4, Intel sees sales coming in at $11.4 billion, plus or minus $400 million.

The PC industry has struggled in recent months with soft demand in the United States and Europe as well as rising inventories for chips and other components that have led some customers to reduce their orders for new parts.

Global semiconductor sales could grow just 5 percent next year as the economy continues to struggle, according to market research firm iSuppli.

The world’s top microchip maker expects gross margins of 67 percent in the fourth quarter, give or take a couple of percentage points, compared with 66 percent in the third quarter.

Intel’s results were buoyed by a 3 percent sequential increase in data center sales in the quarter, a business with higher margins than chips for PCs.

Some investors believe tech vendors’ sales will pick up in the final months of 2010 as shoppers warily spend on holiday gifts — with an out-sized amount going to smartphones and tablets such as Apple Inc’s iPad while sales of PCs flounder.

Microprocessors made by Intel run 80 percent of the world’s computers, but the Santa Clara, California-based company has yet to develop much presence in smartphones and tablets, which are often powered by energy efficient processors designed by ARM Holdings.

After hours, Intel is up to $20.22. With a quarter to go, Intel is probably on track to earn $2 per share for this year. That’s pretty good. Intel is a decent buy (though not a outstanding one) anytime it’s under $20.

Fed Minutes Reveal “Uncertainty”
Posted by Eddy Elfenbein on October 12th, 2010 at 2:37 pm

Are you ready for this one? The minutes of the last Fed meeting showed that members are, get this, uncertain about the state of the economy.

Well, now we know!

Minutes released Tuesday of the most recent meeting of the Federal Open Market Committee, the Fed panel that sets monetary policy, revealed that a considerable number of central bank officials “consider it appropriate to take action soon,” given the persistently high unemployment rate and the uncomfortably low inflation rate.

But other Fed officials “saw merit in accumulating further information before reaching a decision,” according to the minutes of the Sept. 21 meeting, which lasted 5 hours and 10 minutes, longer than usual — an indication of the differences of opinion that can accompany any policy decision.

Most Wall Street analysts now expect the committee to decide, at its meeting on Nov. 2 and 3, to resume the debt-buying strategy, known as quantitative easing. But the minutes suggested that while that outcome is certainly possible, it is not a done deal.

At first, Wall Street rallied slightly on the uncertainty bombshell. After about 15 minutes, they had second thoughts. Feel the excitement!

Taleb’s Awful Bond Market Call
Posted by Eddy Elfenbein on October 12th, 2010 at 12:41 pm

From February 4 of this year:

Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

How’s that no-brainer working out? Here’s the 10-year T-bond yield year-to-date:

UBS Says Expensive Stocks Are the Cheapest. Wait…What?
Posted by Eddy Elfenbein on October 12th, 2010 at 10:32 am

Today’s game is called, Spot the Logical Fallacy!

Investors should purchase stocks with the highest price-to-earnings ratios because their valuation premium to the cheapest shares is too low, according to Jonathan Golub at UBS AG.

The gap between the Standard & Poor’s 500 Index industries with the highest and lowest P/Es narrowed to 3.6 last month from 9.6 in 2006, according to UBS, which used projected earnings for its valuations.

The disparity suggests purchasing expensive stocks may boost returns during the next 12 to 24 months, the UBS strategist said. The three industries with the highest multiples in the S&P 500 are industrials, consumer discretionary and consumer staples, according to UBS.

“This is akin to purchasing a Picasso when high-priced artwork is out of favor,” Golub, the New York-based chief U.S. market strategist, said in a telephone interview yesterday. “On a relative basis, cheap stocks are overvalued because they are much closer to the market average. It’s not that I want to overpay for companies, but rather traditionally high P/E stocks are cheaper than they should be.”

Did you find it? The problem is that this argument assumes that all the high-P/E Ratio stocks will stay the same. Even if the thesis is correct, the market may very well choose another cohort of stocks to send to the upper-P/E Ratio bin.

This sloppy thinking happens a lot. Last year, Paul Collier wrote an influential book called The Bottom Billion. In it, he said that the poorest countries in the world regularly fall behind everyone else in terms of growth. Like most tautologies, that statement is true. Poor countries do indeed always fall behind everyone else. That’s why they’re poor.

William Easterly wrote:

Collier selected countries that were on the bottom at the end of a specific period, so naturally they would be more likely to have had among the worst growth rates in the world over the preceding period. This ex post selection bias makes the test of poor-country divergence invalid. The correct test would be to see who is poor at the beginning of the period and then see if they have worse growth than richer countries in the following years. When the test is run this way, there is no evidence that poor countries grow more slowly than richer countries.