• Wells Fargo Beats by a Penny
    Posted by on October 14th, 2015 at 10:23 am

    Earnings season is underway for our Buy List. This morning, our first Buy List earnings report came out. For Q3, Wells Fargo (WFC) earned $1.05 per share which topped Wall Street’s estimate by one penny per share. The bank’s revenue rose to $21.88 billion which beat estimates by $120 million.

    Wells Fargo’s loan activity picked up during the quarter. Total loans at the end of the quarter were $903.23 billion, a 7.7% increase from $838.88 billion in the same period a year ago. Commercial and industrial loans, which make up one of the largest parts of the bank’s total portfolio, were $292.23 billion, up 15% from $254.2 billion in the same period last year.

    That’s pretty good. The downside is that Wells’s net interest margin came in a tad below 3% which isn’t where I’d like it. The bank has also been squeezed by dud loans to the energy sector. There’s been a lot of careless jabber on Wall Street that large banks are much more vulnerable to bad energy loans than people realize. Truthfully, it’s an issue, but it’s not an earnings killer. Last quarter, Wells didn’t release a dime in loan loss reserves.

    Loans to energy companies comprised about 2% of Wells Fargo’s overall portfolio, but the bank said after its second-quarter earnings report that there was a risk of delinquency on $508 million in those balances, or around four times its estimate for the first quarter.

    In the third quarter, Wells Fargo set aside $703 million to cover loans that could potentially turn bad in the future. That compares with $368 million in the third quarter of 2014 and $300 million in the second quarter. The bank lost $703 million to loan defaults, or 0.31% of its overall portfolio, compared with a 0.32% charge-off rate in the third quarter a year ago.

    More importantly, Wells is profiting from the slowly-recovering consumer.

    Overall profits at Wells Fargo’s community banking division, which includes its consumer operations, were $3.69 billion, a 6.5% increase from the $3.46 billion it earned in the third quarter of 2014. Wells Fargo’s wholesale banking division recorded profits of $1.77 billion, down 8.1% from the $1.93 billion it reported in the same quarter last year. The bank’s wealth, brokerage and retirement unit posted profits of $606 million, a 10% increase from the $550 million it earned in the third quarter of 2014.

    Costs increased 1.2% to $12.4 billion. Expenses as a share of revenue was 56.7%, within the range of 55% to 59% that Wells Fargo targets for its so-called “efficiency ratio.”

    Wells Fargo’s mortgage business, the largest in the U.S. by volume, earned $1.59 billion in fees in the quarter, down 2.7% from the $1.63 billion it earned in same period a year ago. The bank extended $55 billion in home loans between the end of June and the end of September, compared with $48 billion in the third quarter of 2014 and $62 billion in the second quarter of this year.

    A large piece of Wells Fargo’s growth strategy this year has involved acquiring assets and businesses that General Electric Co.’s finance arm was shedding as part of the manufacturer’s retreat from banking. Within the past two weeks the bank announced it was acquiring the conglomerate’s railcar leasing and commercial lending and leasing businesses, and earlier this year it purchased $9 billion of GE’s property loans.

    Wells started off the year quite well for us, but it’s been lagging the market for the past two months. It’s been especially bad since the market turned towards cyclicals about two weeks ago. This isn’t so much a problem for Wells as it has been for the entire financial sector. The shares are down about 1% this morning, but it’s not something to worry about.

  • Morning News: October 14, 2015
    Posted by on October 14th, 2015 at 7:09 am

    U.K. Unemployment Unexpectedly Drops to Least Since 2008

    China Third-Quarter Growth Seen Dipping to 6.8%, Weakest Since 2009

    Brazil’s Next Big Crisis Is Scaring Bankers and Wiping Out Jobs

    Cyberspace Becomes Second Front in Russia’s Clash With NATO

    Gold Hits 3-Month High on Talk of Delay in Fed Rate Hike

    A 2nd Fed Governor Opposes Raising Rates This Year, Breaking With Yellen

    Mounting Full-Time Employment Shows Less Slack for Yellen’s Fed

    Why Angus Deaton Deserved the Economics Nobel Prize

    Wells Fargo to Buy $32 Billion GE Assets, Add 3,000 Workers

    Mega Beer Deal Offers Molson Coors a Bigger Swig of U.S. Market

    Twitter to Cut Up to 8% of Workforce

    Intel Q3: Cloud, Memory Chips Shine, Enterprise Weakens

    BofA Posts Quarterly Profit as Expenses Fall

    Joshua Brown: Why the Stock Market Has to Go Down

    Howard Lindzon: Stocktoberfest 2015- Robinhood, Stocktwits and SparkFin

    Be sure to follow me on Twitter.

  • Big Move for Wells Fargo
    Posted by on October 13th, 2015 at 2:20 pm

    Just ahead of their Q3 earnings report, Wells Fargo (WFC) announced they’re buying $32 billion in assets from General Electric (GE). Wells will take on 3,000 GE employees.

    The sale includes commercial-distribution and vendor-finance units, and a portion of the corporate-finance business, from GE Capital, San Francisco-based Wells Fargo said Tuesday in a statement that didn’t include additional terms. The transaction is expected to be completed in the first quarter of 2016 and would allow the finance unit to return about $4.2 billion of capital to its parent, GE said in a separate statement.

    Wells Fargo has been one of the biggest buyers of GE assets. In September, the lender agreed to purchase the bulk of a railcar- and locomotive-leasing unit from the company, and earlier this year, Wells Fargo said it would acquire GE real estate assets.

    “This acquisition is an outstanding opportunity for Wells Fargo to deepen relationships and strengthen our presence in key commercial lending markets,” Tim Sloan, head of the wholesale banking division, said in the statement.

  • Morning News: October 13, 2015
    Posted by on October 13th, 2015 at 7:09 am

    Global Stocks Lower as China Concerns Deepen

    Pound Falls to Five-Month Low as Inflation Rate Turns Negative

    Switzerland Said to Impose 5% Leverage Ratio on Big Banks

    Oil Surplus to Persist in 2016 as IEA Sees Demand Growth Slowing

    Fed’s Brainard Urges Patience in Raising Rates Amid Global Risk

    The Truth About Stock Sectors

    AB InBev, SABMiller Brew Up $100 Billion Deal

    Dell to Buy EMC in Biggest Tech Takeover, a Year in the Making

    Etihad Airways Signs $700 Million Deal With IBM

    Barclays Set to Name Jes Staley As Chief Executive

    Investors Joining Messaging Startup Symphony, to Tune of $100 Million

    Orlen Buys Oil and Gas Assets in Canada, Poland for $392 Million

    Eli Lilly Abandons Heart Disease Drug in Final Stage of Trials

    Shell Is Reeling After Pulling Out of the Arctic

    Cullen Roche: Game Theory Thinking – Mets/Dodgers Edition

    Roger Nusbaum: The Zinc Rally?

    Be sure to follow me on Twitter.

  • Dell to Buy EMC for $67 Billion
    Posted by on October 12th, 2015 at 10:55 am

    This morning we got the news that Dell is going to buy EMC (EMC) for $67 billion. This is the largest tech deal ever.

    For those of you who remember the 1990s, you certainly remember these two stocks. EMC was the #1 performing stock on the 1990s. The shares gained 80,575% in that decade.

    Not only was EMC the top performer of the decade, but that’s the best return of any stock in any decade in NYSE history. Shares of EMC gained, on average, 1% every 5.43 calendar days for 10 straight years.

    In seven years, EMC split 2-for-1 an amazing five times. EMC went public on April 4, 1986 at $16.50 per share. Adjusted for splits, that comes to 23 cents per share. Today, it’s around $28 per share. Of course, the stock fell from $104.94 in 2000 down to $3.67 in 2002.

    EMC has one of the more interesting long-term charts you’ll see:

    sc10132015a

  • Morning News: October 12, 2015
    Posted by on October 12th, 2015 at 6:52 am

    Russia’s Gazprom Resumes Gas Supplies to Ukraine

    Bankers Grapple With How to Help Emerging Markets

    Bernanke: Fed Critics Were ‘Mistaken’

    Oil Takes a Third Swing at Holding $50 as OPEC Sees Recovery

    Energy Storage Needs to Think Bigger Than Batteries to Beat Fossil Fuels

    Ford to Focus $1.8 Billion on China Smart Cars

    Ferrari to Be Valued at Up to $9.82 Billion in IPO

    Glencore Starts Process to Sell Some Assets in Chile and Australia

    ‘Stars Aligned’ For AB InBev’s Megabrew Merger Plan

    PC Shipments Continue to Slump

    Dell to Buy EMC for $65 Billion, a Record Takeover in Technology

    What Scandal? Fantasy Sports Sites Just Had Their Biggest Weekend Ever

    He’s a Banker, Crocodile Farmer and Wanted in the United States

    Joshua Brown: and now, a brief rant about historic valuation

    Jeff Miller: Earnings Recession Coming? Does It Matter?

    Be sure to follow me on Twitter.

  • Reader’s Poll: Let Me Hear from You
    Posted by on October 9th, 2015 at 10:49 pm

    I’ve been talking with an ETF firm about launching a tradeable version of our Buy List. This would be the entire Buy List packed into one stock that could be bought and sold just like any other stock.

    Naturally, we’re curious about the level of interest in such a product. That’s why I’m turning to you. Don’t worry, I’m not asking for any type of commitment. Nor should you feel any pressure in voting “yes.” I’m trying to gauge an accurate assessment of potential demand.

    Would you be interested in investing in a tradeable Crossing Wall Street ETF?

    If so, how much would you consider investing?

    Thanks for your help!

  • CWS Market Review – October 9, 2015
    Posted by on October 9th, 2015 at 7:08 am

    “Become more humble as the market goes your way.” – Bernard Baruch

    Ladies and gentlemen, our “All Clear” signal has officially been triggered!

    On Monday, the VIX closed below 20. That’s been my boundary marker to consider the market’s recent unpleasantness to be behind us. That ended a run of 30 consecutive days in which the VIX closed above 20. It was longest such streak in more than three years.

    Fortunately, the stock market has been behaving much better recently. The S&P 500 has rallied seven times in the past eight sessions. On Thursday, the index not only broke above 2,000 for the first time in seven weeks but it also closed above its 50-day moving average, which is a key technical indicator.

    big10092015

    But here’s a fact investors need to understand: the market’s recent uptick is quite different from what we’ve seen before. Lately, it’s been the cyclical stocks that have grabbed Wall Street’s attention. In this week’s CWS Market Review, we’ll take a closer look at what’s made traders so happy this week. I’ll also preview our first Buy List earnings report for the Q3 earnings season. Later on, I’ll bring you up to speed on our Buy List stocks. But first, let’s look at last week’s poor jobs report and how it vindicates Janet Yellen and the Federal Reserve.

    Yes, the Fed Got It Right

    Last Friday, the Labor Department released the September jobs report, and it wasn’t a good one. The U.S. economy created only 142,000 net new jobs last month which was well below expectations.

    For some context, the economy had been churning out an average of 200,000 jobs per month for the last few years. Not only was the September report bad but the government also lowered the numbers for July and August by 59,000.

    What’s more is that more folks are simply opting out of the jobs market entirely. Last month, the labor-force participation rate dropped down to 62.4% which is a 38-year low. Some of the decline, but not all, is due to demographic factors like retiring Baby Boomers.

    They key takeaway from this report is that it vindicates the Federal Reserve’s decision last month to hold off on raising interest rates. Honestly, it seems like a no-brainer. How can you argue that the economy’s overheating when job growth is so slow and there’s no inflation in sight? In fact, the dominant global-economy story this year is massive commodity deflation. The Fed’s had rates at 0% for seven straight years, so what’s a few months more?

    Now we have some more details on the Fed’s mindset. On Thursday, the Fed released the minutes from its September meeting, and it showed that members were concerned that the economy wasn’t strong enough for a rate hike. Broadly speaking, the Fed is still optimistic about the economy. I think they’re probably right. I don’t see a recession looming for us. Rather, the economy will likely experience more growth, but at a subdued pace.

    Getting a rate increase is tricky. What’s interesting is that in 2010-11, several countries like Sweden, Norway, Australia and Israel went ahead with premature rate hikes, and then they quickly backed off when the damage became apparent. What makes the story more interesting is that at the time, Stanley Fischer was head of the Bank of Israel. Now he’s the number 2 at the Fed. We also know from history that raising rates before the economy is ready can lead to trouble. In 1937, the Fed made a similar mistake when it incorrectly thought the Great Depression was behind it. Short version: it wasn’t.

    For much of this summer, the Fed sent signals to investors to expect higher rates soon. I talked a lot about that in previous issues. Now we know that “soon” isn’t quite as soon as we thought. For its part, the market is quite pleased that 0% rates will be around for a bit longer. The futures market doesn’t see a rate hike coming until March, and a second hike may come next September. Just look at the bond market: three weeks ago, the six-month Treasury was yielding 0.27%. Today that’s down to 0.07%.

    The Market’s Shift Towards Cyclicals

    The stock market is also happy about lower rates. (Perhaps Carl Icahn’s warning from last week was a signal to buy.) The key fact about the market’s recovery is that it’s been led by cyclical stocks. By Cyclicals, I mean businesses that are heavily tied to the business cycle. This would include areas like steel, cars and railroads.

    The three key cyclical sectors I like to watch are the Industrials (XLI), the Materials (XLB) and Energy (XLE). In the last eight days, the S&P 500 has gained 6.997%, but over that same time, XLI is up 9%, XLB is up 13% and XLE is up more than 15% (see below). Of course, these were the sectors hit the hardest over the past few months, so what we’re seeing is a cyclical rebound. Once a cyclical trend gets established, it tends to run on for a long time. Of course, that’s why they’re called cyclicals. The difficulty is spotting the turning points, and we may have just seen one.

    big10092015a

    One cyclical stock on our Buy List is Wabtec (WAB). In fact, I would say Wabtec is a classic cyclical. The company makes locomotives, brakes and other parts for the freight and passenger-rail industries. The shares are up 8.5% over the last eight days.

    Another cyclical on our Buy List is Ford Motor (F). If you recall, the company recently announced its best September in 11 years. The shares have risen eight days in a row for a total gain of 14.2%. The stock closed Thursday one penny below $15 per share. The automaker hasn’t closed above $15 since July. I think we’ll see another solid earnings report from Ford later this month.

    Another helpful sign for Cyclicals is that some commodity prices have found their feet. Oil, for example, broke $50 per barrel for the first time since July. Only a few weeks ago, oil was less than $38 per barrel. The recent rise probably reflects the actions of the Russian military in Syria. While Syria isn’t a big deal in the global oil market, it’s located in a very important neighborhood.

    Mirroring the leadership in Cyclicals has been a somewhat tame performance from defensive sectors like Consumer Staples and Utilities. The Healthcare sector continues to be hurt by crumbling biotech shares. The biotech bubble has been bursting, and it’s not over.

    I often say that true stock bubbles are quite rare. The problem is that market gurus love to proclaim bubbles. In reality, they don’t come along that often, and they’re usually focused in a sector.

    Four years ago, right about this time, the Biotech ETF (IBB) was going for less than $88 per share. By this summer, it skyrocketed to $400 per share. Since then, it’s slowly deflated, and then Hillary’s Clinton’s tweet knocked the entire sector for a loop. Late last month, IBB dropped to $285 per share. It’s recovered a bit since then, but my advice is to stay away. This sector hasn’t hit bottom just yet.

    When I say that we’ve hit our “All Clear” signal, I don’t mean to say that investors should expect a robust rally. Rather, I mean that we can expect reduced daily volatility. I doubt we’ll see as many 2% moves for the rest of the year or the hyperactive intra-day swings that characterized the past six weeks.

    The midpoint of the S&P 500’s high close (2,130.82 on May 20) and low close (1,867.61 on August 25) comes to 1,999.215, and we just passed it. In other words, we’ve made back half of what we lost. It took a few weeks, but we’ve shaken off the late-summer story. Now we can focus on Q3 earnings season.

    Wells Fargo Earnings Preview

    Wells Fargo (WFC) is scheduled to report Q3 earnings before the market opens next Wednesday, October 14. This will be an interesting report for the big bank because the last report was decent but nothing great. Don’t be fooled—the bank is still very strong. The problem for Wells has been a weak mortgage market, and there’s not much they can do until that sector improves. For Q2, Wells’s mortgage-banking revenue fell by 1%. The bank’s net interest margin, which is a key metric for banks, has fallen below 3%. With ultra-low rates, that’s put the squeeze on all of their costs.

    The stock got dinged up pretty hard in the August swoon. At one point, Wells dropped below $48 per share. The shares are still pretty cheap. Let’s look at some numbers. The bank should earn about $4.50 per share next year, give or take. If it can trade at 14 times that, which is hardly excessive, that translates to a price of $63 per share. Going by Thursday’s close, Wells would have to rally 20% to get there.

    Wells has been one of the strongest large banks in the country. They’re also one of the few banks whose dividend is higher now than it was at the onset of the financial crisis. The dividend now yields 2.85%. That certainly beats 0% in short-term Treasuries. The consensus on Wall Street is for Wells to report Q3 earnings of $1.04 per share. That matches my numbers. By the way, if you want to know more about Wells Fargo, Jim Cramer recently had a good interview with John Stumpf, Wells’s CEO.

    Buy List Updates

    Express Scripts (ESRX) said this week that it will cover two new cholesterol-lowering drugs, Praluent from Regeneron and Sanofi, and Repatha from Amgen. Both drugs were approved this summer, and both run about $14,000 per year.

    Express Scripts said that next year, it will spend $750 million on these drugs. That’s probably too low, and a lot of folks on Wall Street said Express’s math doesn’t add up. They’re obviously getting a big discount. This week’s announcement will give a lift to ESRX’s business next year. I still think the shares are going for a good value at the current price. I like this stock. Look for another good earnings report later this month.

    Shares of eBay (EBAY) got knocked for a 6% loss on Thursday. But the catalyst for the loss didn’t involve eBay. Instead, it was the news that Amazon (AMZN) is going to take on Etsy (ETSY). I think it’s interesting that eBay lost more than Etsy did on the news. Etsy is a site that lets artisans sell their wares over the Internet. Amazon may not make a lot of money, or probably lost more last quarter, but they’re the undisputed giant in online retail.

    That’s all for now. Early earnings reports will start to flow in next week. It won’t take long before we get an idea of how well Corporate America did during Q3. There will also be some important economic reports. On Wednesday, the Census Bureau will report on retail sales for September. The CPI report comes on Thursday. This will be an interesting CPI report because the last one showed the lowest inflation all year. It was actually deflation. You can be sure bond traders will be eyeing next week’s CPI report closely. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: October 9, 2015
    Posted by on October 9th, 2015 at 6:28 am

    China ‘Golden Week’ Retail Sales Growth Slows to 11% Year-On-Year

    Spanish Bonds Beating German Peers Signals Wagers on Stimulus

    U.S. Chases Swiss Bank Secrets to Singapore and Israel

    Treasuries Erase Losses After Fed Minutes Highlight Global Risks

    Alcoa’s News Isn’t All Bad for China

    Products With Plastic Microbeads To Be Banned Under New California Law

    Lyft Offers Car Rental, Fuel Perks to Keep Drivers Happy

    AppDirect Lands $110 Million at More Than $1 Billion Valuation

    Gap Reports Downbeat Profit Guidance, Drop in September Sales

    Suncor Criticizes Canadian Oil Sands’ Move to Adopt Poison Pill

    Six Credit Suisse Financial Advisers Leave Ahead of Overhaul

    Twitter, Inc. Exec Drops Hints About the Future of Its 140-Character Limit

    Regulators Investigating 2nd VW Computer Program on Emissions

    Jeff Carter: Hillary and the HFT Tax

    Howard Lindzon: Ticketfly Acquired By Pandora – My Investment Story

    Be sure to follow me on Twitter.

  • Amazon Lauches Etsy Competitor
    Posted by on October 8th, 2015 at 11:23 am

    The stock market is lower this morning, but not by much. I think there’s an expectation that we’re soon going to attack 2,000 on the S&P 500.

    This morning’s jobless claims report was a good one. Jobless claims fell to 263,000 which is the lowest in nearly two months. It’s also pretty close to a 42-year low.

    At 2 pm, the Fed will release the minutes from their last meeting. This is the meeting where they held off on a rate increase. That seems to have been the right move. Wall Street will look at the minutes closely for signs of what the central bank is thinking.

    Shares of eBay (EBAY) are down 7% this morning. The story here isn’t so much about eBay but about Etsy (ETSY). Amazon (AMZN) has launched a site that will compete with Etsy and may probably finish off the company.