Archive for January, 2011

  • JPMorgan Earns $1.12 Per Share
    , 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
    , January 14th, 2011 at 8:30 am

  • The Financial Panic Was a Government Panic, Too
    , 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
    , 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

  • Morning News: January 14, 2011
    , January 14th, 2011 at 7:34 am

    Can Europe Be Saved? (When he’s not calling innocent people murderers, Paul Krugman writes very well on economics.)

    China Raises Banks’ Required Reserves Again

    China, Japan, And The Sudan Proxy Playground

    Goldman Says S&P 500 to Gain 18%, Forecasts `Decent’ Year for Treasuries

    Bernanke Says Joblessness to Linger Despite Growth

    Uncle Sam Wants His AAA Rating

    Stock Index Futures Dip; Eyes on Intel

    Citigroup Was On The Verge Of Failure, New Report Finds; Rescue Was Based On ‘Gut Instinct’

    Cupcake IPO

    JPMorgan’s Fourth Quarter Profits Rise 47% to $4.8 Billion

    Marathon Oil Credit-Default Swaps Surge on Risk Tied to Spinoff Proposal

    Joshua Brown: Ancient Asian Cooling Technique

    Leigh Drogen: Social Capital and Collaborative Consumption

  • 30 Straight Days Above the 10-DMA
    , January 13th, 2011 at 1:24 pm

    Here’s a fascinating factoid I found via Sentiment Trader via ZeroHedge via Pragmatic Capitalist: The S&P 500 has closed above its 10-Day Moving Average for the last 30-straight trading sessions.

    That’s the longest streak since a 42-day run from February to April 2010. The longest I can find (my records go back to the 1930s) is a 59-day streak from November 1970 to February 1971.

    We’re about 15 points above the 10-DMA which means that this run may have some room to go, especially if volatility stays so low.

    Part of this, I think, is due to the market’s ultra-low volatility combined with a slow-motion rally. The S&P 500 has closed higher for 21 of the last 30 days and for 43 of the last 67 days.

  • What If Apple Were In the Dow?
    , January 13th, 2011 at 11:31 am

    In June 2009, the gatekeepers of the Dow Jones Industrial Average decided to put Cisco (CSCO) in the index in place of General Motors (GM). The guys at Bespoke wonder what would have happened if they had chosen Apple (AAPL) instead. The difference: 1,000 more points.

  • FBR’s Target for AFL = $69
    , January 13th, 2011 at 11:00 am

    I thought Aflac made it pretty clear that they were going to survive Europe’s troubles, but apparently FBR was late to get the word:

    Aflac is well positioned to weather credit losses in Europe and investors should take advantage of the discounted stock of the disability insure, an analyst said Thursday.

    FBR Capital Markets analyst Randy Binner upgraded Aflac’s shares to “Outperform” from “Market Perform,” and lifted the price target to $69 from $59. Binner said the stock has lagged its peer group by 14 percent in the last three months, likely on heightened concerns over European sovereign debt.

    Aflac’s exposure to debt holdings from Portugal, Ireland, Italy, Greece and Spain total $3.4 billion, or 34 percent of equity. Binner said the company has more than enough cash on hand, about $1.3 billion, to cover losses in even the most stressed scenarios.

    Additionally, the analyst still expects Aflac to buy back between 6 million and 12 million shares over the next two years, despite European losses.

  • Morning News: January 13, 2011
    , January 13th, 2011 at 7:41 am

    Stock Futures Flat Ahead of Jobless Data, Intel Results

    Trichet Faces `Annus Horribilis’ as Crisis Tests European Central Bank

    China Expands Yuan’s Role to Overseas Investment

    Indian Oil Margins May Fall on Rising Crude Oil Prices

    Another Asian Economic Power Just Hiked Rates To Fight Inflation

    Beige Book Shows Increased Activity

    1 Million Homes Repossessed in 2010

    AIG Readies for Recapitalization

    Auto Rebound Pays Dividend to Ford, GM Work Forces

    In Nielsen’s Public Offering, a Bellwether for Buyout Firms

    Paul Kedrosky: The Debt Ceiling and Gravity

    The Most Amazing Press Release Ever Written

    An Empty “Ghost town” – Ordos, China

  • Maria Bartiromo Interviews Jamie Dimon
    , January 12th, 2011 at 4:09 pm

    It’s a good interview. (One nitpick: He says he wants to reinstate the dividend. Um, Jamie…you already have one.)