Author Archive

  • Weill: Breakup Up the Big Banks
    , July 25th, 2012 at 12:20 pm

    Sandy Weill, the man who grouped Citigroup ($C), made news today by calling for the breakup of large banks.

    Former Citigroup chairman Sandy Weill — who engineered a series of corporate takeovers and lobbying efforts to create Citigroup — explained during an interview on CNBC why he now thinks a firewall between commercial and investment banks is needed.

    “What we should probably do is go and split up investment banking from banking,” Weill said. “Have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.”

    Weill’s call to break up the nation’s largest banks comes a little more than a decade after he helped orchestrate the merger of Travelers Group and Citicorp, a deal that created what was the world’s largest financial services company.

    Sorry, Sandy, but you’re a little late. I called for Citi to be broken up by management seven years ago:

    I think that the real problem is that “Citi” as it’s now constructed doesn’t work. Big doesn’t mean better. Commerce (CBH) is so much stronger than Citi right now even though it’s around 1/40th the size. With Sandy out of the way, Prince & Co. should break up the company. The Travelers Life & Annuity sale should be the first of many more sales. A breakup will be better for shareholders, customers and employees.

    Citigroup is a good example of a stock that looks cheap, but really isn’t. The firm is still on the Federal Reserve’s Double Secret Probation. Citigroup is barred from making any more acquisitions. Now that it looks like any new Fed chair will be raising rates next year, I’d stay far away from Citigroup.

    At the time I wrote that, shares of Citi were at $44 — which is now equivalent to $440 due to the 1-for-10 reverse split. The stock is currently at $25 per share.

    By the way, Commerce was later bought out almost exactly at the market peak by TD Bank Financial Group for $8.5 billion.

    Josh Brown adds his thoughts about Sandy: “One wonders whether or not he is sincere or if there is some angle. Or perhaps this is about burnishing his legacy. Or maybe he means it.”

  • Ford Earns 30 Cents Per Share
    , July 25th, 2012 at 11:17 am

    Ford Motor‘s ($F) earnings are out. We knew they were going to be bad; the only question was how bad. The answer: not as bad as feared. For Q2, Ford earned 30 cents per share which was two cents more than Wall Street’s forecast. Obviously, the big problem is Europe where Ford is bleeding red ink. In North America, however, business is going pretty well.

    Ford said it earned $1 billion in the quarter compared to $2.4 billion in the same period last year. While its core North American business continued to perform well, it reported a loss of $404 million in Europe.

    The automaker now expects to lose more than $1 billion in Europe this year, as increasingly worse sales there drag down what is otherwise a turnaround.

    “The magnitude of this loss will be affected by a number of factors, including the overall economic environment, competitive actions, and Ford’s response to those developments,” the company said in a statement.

    European car sales have fallen to their lowest level in a decade, and most automakers are struggling with overcapacity there. Ford said the region’s problems are “more structural than cyclical” and would not improve any time soon.

    Ford’s chief financial officer, Robert Shanks, called the deteriorating market conditions in Europe “very, very serious.”

    The problem here isn’t the operations of the company; it’s the weak growth in Europe. The reason I’m not terribly worried about Ford is that this is a problem not endemic to Ford. I continue to believe this is a very cheap stock. The market, however, isn’t yet convinced. Once Ford is able to put together some profitable quarters from overseas, I think the stock will respond.

  • Hudson City Beats By One Penny
    , July 25th, 2012 at 11:02 am

    This morning, Hudson City Bancorp ($HCBK) reported Q2 earnings of 15 cents per share which was one penny more than Wall Street’s consensus.

    The good news is that the bank is still profitable and they’re continuing their quarterly dividend payout of eight cents per share. The bad news is that they’re getting squeezed by ultra-low interest rates. The acting CEO said:

    Over the past several quarters, we have discussed the challenges facing our traditional residential portfolio lending model. The extraordinarily low market interest rates combined with the GSEs participation in the mortgage market persist and make it difficult for us to profitably grow our business in the same manner as we have in the past. It is apparent that these market conditions are likely to continue for the foreseeable future. Accordingly, we have been developing a variety of strategies to help us adapt to the new environment in which we operate.

  • Morning News: July 25, 2012
    , July 25th, 2012 at 6:40 am

    EU Rushes to Make ECB Single Bank Watchdog in Race to Save Spain

    Libor Probe Expands to Bank Traders

    Japan Flags Yen-Sales Impact as BOJ Eyes More Easing

    China Slowdown to Weigh On Results, Outlook Of Nissan, Rivals

    Companies Say 3 Million Unfilled Positions in Skill Crisis

    New York Fed Faces Questions Over Policing Wall Street

    Fed Leaning Closer to New Stimulus if No Growth Is Seen

    Softer Sales of iPhones Hurt Apple

    Apple’s Reality-Check Quarter In Charts

    AT&T Posts Higher Profit and Holds On to Its Subscribers

    Wal-Mart Lines Up Against Credit-Card Fee Settlement

    Netflix Struggles to Win Subscribers, Profit Falls 91%

    Peugeot Defends Job Cut Plan After Slumping to H1 Loss

    PPR Finds Bolt No Match for Champagne in Race with LVMH

    Pragmatic Capitalism: Goldman Sachs: US Growth Decline Has Hit a Bottom

    Howard Lindzon: Snacking on Apple…and the Power of a Stocktwits Stream of People

    Be sure to follow me on Twitter.

  • Possible Action from the Fed
    , July 25th, 2012 at 12:30 am

    So far, I’ve said that the Federal Reserve isn’t likely to start a third round of quantitative easing. In the past, the central bank has been pretty clear about its intentions. Until now, we haven’t seen any indications. Today that changed.

    Late on Tuesday, Jon Hilsenrath of the WSJ reported that the Fed is indeed considering more action. This strikes me as mostly PR, and the story is quite vague. Still, they wouldn’t say it unless they meant something.

    The GDP report this week won’t be pretty. I think it will be difficult for the Fed to do much of anything just before an election.

  • Negative Yield on 20-Year TIPs
    , July 24th, 2012 at 11:42 pm

    Dear lord. You can loan Uncle Sam money for the next 20 years and lock in a real return of 0.09% a year.

    Here’s the TIPs yield curve:

  • AFLAC Earns $1.61 Per Share for Q2
    , July 24th, 2012 at 4:32 pm

    Three months ago, AFLAC ($AFL) said it expected Q2 earnings of $1.53 to $1.59 per share if the yen averaged 80 to 85. The exchange rate was mostly in the range during Q2, but fell to 78 recently. Today we learned that AFLAC made $1.61 per share for the second quarter which matched Wall Street’s forecast. The company said the exchange rate added a penny per share to the bottom line. For the first half of the year, AFLAC earned $3.35 per share. Currency exchange added six cents per share.

    The bad news is that AFLAC took a bath on some Spanish investments gone very bad:

    After-tax realized investment losses from impairments in the quarter were $223 million, or $.48 per diluted share. These losses primarily resulted from impairments taken on securities issued by Bankia and Generalitat de Catalunya.

    The good news is that AFLAC said that it expects third-quarter earnings to range between $1.64 and $1.69 per share. The Street had been expecting $1.63 per share. AFLAC also narrowed its full-year guidance from $6.46 – $6.65 per share to $6.45 – $6.52 per share (assuming an average exchange rate of 80).

    Operating earnings in the second quarter were $755 million, compared with $727 million in the second quarter of 2011. Operating earnings per diluted share rose 3.9% to $1.61 in the quarter, compared with $1.55 a year ago.

    The stronger yen/dollar exchange rate increased operating earnings per diluted share by $.01 during the quarter. Excluding the impact from the stronger yen, operating earnings per share increased 3.2%.

    Results for the first six months of 2012 also benefited from a stronger yen. Total revenues were up 19.0% to $12.1 billion, compared with $10.2 billion in the first half of 2011. Net earnings were $1.3 billion, or $2.71 per diluted share, compared with $663 million, or $1.41 per diluted share, for the first six months of 2011. Operating earnings for the first half of 2012 were $1.6 billion, or $3.35 per diluted share, compared with $1.5 billion, or $3.17 per diluted share, in 2011. Excluding the benefit of $.06 per share from the stronger yen, operating earnings per diluted share rose 3.8% for the first six months of 2012.

    Reflecting the benefit from a stronger yen/dollar exchange rate, total investments and cash at the end of June 2012 were $109.3 billion, compared with $103.1 billion at March 31, 2012.

    Shareholders’ equity was $14.2 billion at June 30, 2012, compared with $13.6 billion at March 31, 2012. Shareholders’ equity at the end of the second quarter included a net unrealized gain on investment securities and derivatives of $1.5 billion, compared with a net unrealized gain of $1.4 billion at the end of March 2012. Shareholders’ equity per share was $30.37 at June 30, 2012, compared with $29.19 per share at March 31, 2012. The annualized return on average shareholders’ equity in the second quarter was 13.9%. On an operating basis (excluding realized investment losses and the impact of derivative gains/losses on net earnings, and unrealized investment and derivative gains/losses in shareholders’ equity), the annualized return on average shareholders’ equity was 24.0% for the second quarter.

    …

    “I want to reaffirm that in 2012, we expect operating earnings per diluted share to increase in the range of 3% to 6%, excluding the impact of foreign currency. If the yen averages 80 for the full year it’s likely operating earnings per diluted share will be $6.45 to $6.52 for the year, which is toward the lower end of the range, due to the continued low level of investment yields. Using that same exchange rate assumption, we would expect third quarter operating earnings to be $1.64 to $1.69 per diluted share. We believe that is reasonable and achievable. As I conveyed at our analyst meeting in May, for 2013, our target is to achieve growth in operating earnings per diluted share of 4% to 7%, excluding currency. This earnings objective assumes no significant impact on investment income from losses and no further meaningful decline in interest rates.

  • Relative Strength of Cyclicals Hits 3-Year Low
    , July 24th, 2012 at 10:41 am

    One of the metrics I like to follow is the ratio of the Morgan Stanley Cyclical Index (^CYC) to the S&P 500. This tells us how well economically cyclical stocks are doing. As a very general rule, cyclicals tend to move in…well, cycles — and these cycles often last for several years.

    The relative performance of cyclicals peaked in February of 2011. Since then, they’ve lagged the rest of the market. The CYC lost 19% over a five-day span last August. A recent relative performance low came last October, then cyclicals started outperforming again. That ended in February, and cyclicals again have been the stragglers.

    The last time the CYC-to-S&P 500 ratio was this low was exactly three years ago. What’s interesting is that even though the bull market continued to charge from February 2011 to April 2012, the nature of the rally has changed quite dramatically.

    I still think we may make a new bull market high soon, but now this is a defensive-led rally. That’s why staples and healthcare stocks have been so strong, and it’s also why the bond market continues to move higher.

  • Reynolds American Earns 79 Cents Per Share
    , July 24th, 2012 at 10:22 am

    Good news for Reynolds American ($RAI). The tobacco company earned 79 cents per share for their second quarter. That topped Wall Street’s forecast by three cents per share.

    Cigarette maker Reynolds American’s profit grew more than 35 percent in the second quarter as higher prices and cost-cutting helped offset a decline in the number of cigarettes it sold.

    The nation’s second-biggest tobacco company on Tuesday reported net income of $443 million, or 78 cents per share, for the three-month period ended June 30. That’s up from $327 million, or 56 cents per share, a year ago, when the company recorded charges related to a legal case that hurt its results.

    Adjusted earnings were 79 cents per share, beating analysts’ expectations of 76 cents per share.

    The maker of Camel, Pall Mall and Natural American Spirit brand cigarettes said revenue excluding excise taxes fell 4 percent to $2.18 billion from $2.27 billion a year ago. Analysts polled by FactSet expected revenue of $2.24 billion.

    The Winston-Salem, N.C., company said heavy promotional activity by its competitors drove its cigarette volumes down nearly 7 percent to 18.1 billion cigarettes, compared with an estimated total industry volume decline of 1.7 percent.

    Its R.J. Reynolds Tobacco subsidiary sold 4 percent less of its Camel brand and volumes of Pall Mall fell 3.6 percent.

    Camel’s market share fell slightly to 8.3 percent of the U.S. market, while Pall Mall’s market share fell 0.2 percentage points to 8.4 percent.

    The company has promoted Pall Mall as a longer-lasting and more affordable cigarette as smokers weather the weak economy and high unemployment, and has said half the people who try the brand continue using it.

    Reynolds American and other tobacco companies are also focusing on cigarette alternatives such as snuff and chewing tobacco for future sales growth as tax hikes, smoking bans, health concerns and social stigma make the cigarette business tougher.

    Volume for its smokeless tobacco brands that include Grizzly and Kodiak rose nearly 11 percent compared with a year ago. Its share of the U.S. retail market grew 1.7 percentage points to 32.4 percent.

    The most important news is that RAI reaffirmed its full-year forecast of $2.91 to $3.01 per share. RAI is on-track toward hitting that guidance.

  • Earnings Season So Far
    , July 24th, 2012 at 7:48 am

    Wendy Soong of Bloomberg has some of the early numbers for this earnings season. Of the 500 stocks in the S&P 500, 123 have reported so far, 82 have beaten expectations (66.7%), 14 were inline and 27 missed. Share-weighted earnings growth is 1.2%. Excluding financials, it’s 2.9%.