If there is definitely one stock to avoid these days, it's E*Trade (NASDAQ: ETFC). I went back and forth on it over the summer, wondering if it was worthy of a trade at certain points, but after the broker's Q3 earnings report, I just don't have any good feelings about it right now.
Total net revenue declined over 21% to $377.7 million. The net loss per share from continuing operations on a diluted basis plummeted over 300% to $0.60. E*Trade, as we all know, has been a victim of the whole financial debacle. It's provision for loan losses was $517.8 million in the third quarter. This compares to a provision of $186.5 million in the previous year's similar quarter.
E*Trade states in its release that it is trying to further reduce its exposure to risk and it's keen on shoring up the balance sheet. Good attitude, I suppose. Also, daily average revenue trades for Q3 were up 7%. But it doesn't mean anything. This was a terrible quarter. The data is both horrible and telling.
It's a simple proposition for me: stay far away from E*Trade. Sure, there will come a time when the stock might make for a good investment, but that's a long way off. Technically, the stock is weak. And the broker will be unwinding its exposure to the financial markets for a while.
"We continue to apply our value-oriented principles in selecting new growth stocks as we look for companies with superior profitability and strong balance sheets," says Jim Stack.
In his InvesTech Market Analyst, he and analyst Bruce Morison explain, "Our latest featured investment, Charles Schwab Corp. (NASDAQ: SCHW), is a prime example and stands out as a conservative way to access to opportunities in the battered financial group."
"We are increasing our equity allocation in stocks that should show strong relative performance in a market upturn.
"We continue, however, to be very selective in terms of quality, as well as downside risk. Over the past 20 years, brokerage/asset management firms have produced more than twice the return of the market following a bear market.
"The Charles Schwab brand is one of the most well-known and trusted names in the financial services industry. Its strategy is to be competitively priced, but more importantly to be positioned as the gold standard in client service and integrity.
Now eight large brokerage firms have settled with Auction Rate Securities (ARS) investors. This afternoon Bloomberg News reports Goldman Sachs (NYSE: GS) and Deutsche Bank settled with state regulators. Merrill Lynch & Co., Inc. (NYSE: MER) announced another prong of its settlement earlier in the day.
What are the terms of the settlement for the latest two? Bloomberg writes that "Goldman will buy back $1.5 billion of the securities and pay a $22.5 million fine. Deutsche Bank will redeem $1 billion of debt and was fined $15 million." In addition to the rogues gallery of big ARS issuers who have yet to settle, investigators are targeting medium-sized brokers -- Charles Schwab (NYSE: SCHW), Fidelity Investments and E*Trade Financial Corp. (NYSE: ETFC).
This leaves major ARS issuers lagging behind their peers. Here are three holdouts (with their 2007 municipal ARS issuance in parentheses):
It turns out that Charles Schwab (NASDAQ: SCHW) and TDAmeritrade (NASDAQ: AMTD) may have sold auction-rate securities by using misleading marketing about whether or not the instruments were "cash equivalents." According to The New York Times, the "point of sale" activity at the discount and retail brokerages is similar, they said, and some of the discount brokerage firms use financial advisers or may have improperly listed information on their websites.
Schwab argues that it was only an "agent" and did not slant the marketing of auction-rates one way or the other.
It is safe to predict that Andrew Cuomo, the New York State Attorney General, will get discount brokerage firms to buy the auction-rate paper back from their customers. Cuomo can probably find some marketing material where the nature of the securities was represented the wrong way.
But, Cuomo's actions have stepped over the line. In all probability, many discount brokerage customers bought the auction-rates on their PC without seeing any information about whether their liquidity could be undermined. Discount brokerage customer often do their own research.
Cuomo won't care. He won't try to find out which people got their auction-rates without being attracted to them by marketing. He will get the discount firms to buy all of the paper back. The companies do not want years of litigation.
Cuomo is running for governor, or perhaps the U.S. Senate. He does not have time to pause for such details.
Douglas A. McIntyre is an editor at 247wallst.com.
Talk about an interesting day for E*Trade (NASDAQ: ETFC). The broker, a competitor of TD Ameritrade (NASDAQ: AMTD) and Charles Schwab (NASDAQ: SCHW), reported Q2 earnings on Tuesday after the market closed. E*Trade saw its stock close up on the day by almost 11% on better-than-average volume ahead of the press release. Then, after hours, the stock was down over 15% as investors digested the data. It was a wild ride indeed, and I'm glad I wasn't on it.
E*Trade saw its total net revenue decrease by 20% to around $532 million. The loss per share came in at 19 cents. According to this Reuters article, Wall Street was hoping the loss would only be 14 cents per share.
E*Trade isn't out of the woods yet, and I think it'll be a while before it fully turns itself around and recovers from the financial crisis it's been suffering. In fact, the release mentioned how the broker lost value on investments in preferred equities of Federal National Mortgage Association (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) in July and that the liquidation of the investments will impact the third quarter. Yeah, I'm sure shareholders of E*Trade love to hear the names Fannie Mae and Freddie Mac thrown around in the earnings report. They're sure to warm the heart.
At one time, I thought E*Trade was worth entering, and it obviously might have been worth trading ahead of the earnings (if you were quick to get out before the after-hours, that is). Now, however, I'm reticent to put any new money to work in the financial sector. It's going to be a while before the financial malaise finally lifts. Since E*Trade is still losing a lot of money and missing estimates, I see no reason to allocate any investment funds here. The stock has become too speculative, and if you want to speculate, I'm sure you can find safer sectors to place some bets.
Disclosure: I don't own any company mentioned; positions can change at any time.
There are many ironies in the fact that President George W. Bush will throw the first pitch at Major League Baseball's All-Star Game in New York. For one, President Bush is the first managing general partner of a Major League team (the Texas Rangers) to become President of the United States.
President Franklin Roosevelt was the first to attend an All-Star Game and throw out the first pitch, starting the tradition. He too had to deal with a poor economy and by the time he threw out that first ball the groundwork was being laid for World War II. President Bush has had to contend with his own war.
While there are differing views as to whether we should have gone into Iraq and whether we should stay or get out, this will always be viewed as George's war, fair or not. And the state of our economy in 2008 will also be viewed as George's economy, fair or not.
The ultimate irony for me is that Yankee Stadium is scheduled to be torn apart at the end of the season. This is YANKEE Stadium and the last president to set foot in it will be George W. Bush. The stadium with the greatest heritage in baseball, the 'House That Ruth Built', is going to be torn apart while our economy is also being torn apart. It is being torn out at its roots.
Charles Schwab (NASDAQ: SCHW) shares are trading higher after the company reported that average daily trading volume rose 15 percent last month, compared to May of 2007. Client assets rose 6 percent to $1.47 trillion in May from $1.39 trillion last May. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SCHW.
After hitting a one-year low of $17.41 in August, the stock hit a one-year high of $25.72 in December. SCHW opened this morning at $21.65. So far today the stock has hit a low of $21.42 and a high of $22.11. As of 1:20, SCHW is trading at $21.99, up 64 cents (3.0%). The chart for SCHW looks bullish and deteriorating slightly, while S&P gives the stock a bullish 4 Stars (out of 5) Buy rating.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 9.9% return in just three months as long as SCHW is above $17.50 at September expiration. Schwab would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
SCHW hasn't been below $17.40 at all in the past year and has shown support around $21 recently. This trade could be risky if the company's earnings (due out in late July) disappoint, but even if that happens, that position could be protected by support the stock might find just above $18, where it bottomed out in the March and April. Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SCHW.
TD Ameritrade Holding Corporation (NASDAQ: AMTD) reported earnings for its second fiscal quarter yesterday, and they were pretty decent for the most part -- some might have thought that investors were completely shunning the market because of all the volatility going on, but TD Ameritrade's results show that a broker can still make money in such a challenging climate.
Even so, overall revenues declined 3% to $623 million. While transaction-based revenues also declined, it should be noted that average client trades per day did increase 23% to 312,000. That's an important measure when talking about brokers such as TD Ameritrade, or competitors such as E TRADE Financial Corporation (NASDAQ: ETFC) and The Charles Schwab Corporation (NASDAQ: SCHW). Earnings per share really shined, rising 35% to $0.31 per diluted share.
TD Ameritrade is sticking to its earnings guidance of a "midpoint forecast of $1.32." Of course, I'd like to see raised guidance, but a reaffirmation is certainly better than a reduction in guidance. Besides, I have to go back to the challenging climate concern -- if TD is happy to keep the forecast right now, then this is definitely positive. Investors would probably do well to at least investigate the brokers. When the economy snaps back, they should rally higher from these levels. TD Ameritrade, while not right up against a 52-week high, actually isn't that far from it, interestingly enough.
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
Charles Schwab Corp. (NASDAQ: SCHW) shares are trading higher after the company reported a first-quarter profit of $305 million, or 26 cents per share, in line with analysts' estimates. SCHW benefited from 246,000 new brokerage accounts during the quarter, 27 percent higher than the year-ago period. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SCHW.
After hitting a one-year low of $17.41 in August, the stock hit a one-year high of $25.72 in December. SCHW opened this morning at $18.73. So far today the stock has hit a low of $18.72 and a high of $19.46. As of 1:45, SCHW is trading at $19.49, up $1.19 (6.5%). The chart for SCHW looks bullish but improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 16.3% return in just five months as long as SCHW is above $15 at September expiration. Schwab would have to fall by more than 22% before we would start to lose money. Learn more about this type of trade here.
Charles Schwab (NASDAQ: SCHW) has a market cap of more than $27 billion. Merrill Lynch's (NYSE: MER) is only $48 billion. That does not put much value on all of the Merrill businesses beyond its individual investor brokerage network. Because of metrics like that, there is speculation that both Merrill and Citigroup (NYSE: C), which owns Smith Barney, might do partial IPOs of their brokerage operations. It could do something for the shareholders of the companies. The institutional trading units of the big financial houses are dragging their value down. The mortgage-backed securities problems could keep it that way for some time.
"It is an obvious thing for them to do. The shares in the brokerage business would be much more highly rated than the parent's stock," one banker told the Financial Times.
The move could also give brokers who work at the private client groups a reason to stay. Any stock options they might get in their parents are probably not worth much. Offering a cut of a new public company could be a strong magnet for holding brokers.
The other benefit of such a move, especially at Merrill, is that the senior management of the brokerage unit feel that it is under-represented in the executive suite where most of the top brass come from trading and banking. Giving them a chance to run their own public company might fix that.
Douglas A. McIntyre is an editor at 247wallst.com.
Tyson Foods (NYSE: TSN) to report Q4 earnings. They are holding a conference call at 9am and a business update later at 10:45am.
Tuesday, November 13
Wal-Mart Stores (NYSE: WMT) to report Q3 earnings; pre-recorded conference call at 7am.
Home Depot (NYSE: HD) to report Q3 earnings; conference call at 9am.
Fed Reserve Governor Randall Kroszner is the Keynote Speaker at Standard & Poor's Banking Conference in New York at 1pm.
Wednesday, November 14
Fed Reserve Chairman Ben Bernanke is the Keynote Speaker at Cato Institute Annual Monetary Conference at 9:10am.
Macy's (NYSE: M) to report Q3 earnings; conference call at 10:30am.
Thursday, November 15
Charles Schwab (NASDAQ: SCHW) to hold business update conference call at 10:30am.
Nevada District Court: Bayer (NYSE: BAY) vs. Watson Pharmaceuticals (NYSE: WPI) on Patent Infringement Lawsuit over the generic birth control drug YAZ.
I can picture Sandy Weill, the former chairman of Citigroup (NYSE: C), now. He's probably pacing the floor of his penthouse apartment, wringing his hands, sweating, perhaps yelling into the phone at someone when he gets a chance. He must be all in a lather about Citigroup's drop in share price (down another 5% so far today to $35.91).
I co-wrote a book about Sandy Weill that came out in 2002 and one thing Mike Brewster and I posited is that Weill would like to run Citigroup until he met his maker. That wasn't in the cards, since he had to step down in 2003 after a series of scandals rocked the bank. And calling Weill the King of Capital, as we did in our book (King of Capital: Sandy Weill and the Making of Citigroup), didn't look so smart not too long after publication either.
Now I've been watching Maria Bartiromo on CNBC reporting that Weill does not want to run Citigroup, but will be happy to help out in the search for a new chief executive. Here's my interpretation: Of course he'd love to jump in and run the company again. He just knows the board could never give him the chance.
If there is definitely one stock to avoid these days, it's E*Trade (NASDAQ: ETFC). I went back and forth on it over the summer, wondering if it was worthy of a trade at certain points, but after the broker's Q3 earnings report, I just don't have any good feelings about it right now. 
Now eight large brokerage firms have settled with Auction Rate Securities (ARS) investors. This afternoon 
There are many ironies in the fact that President George W. Bush will throw the first pitch at Major League Baseball's All-Star Game in New York. For one, President Bush is the first managing general partner of a Major League team (the Texas Rangers) to become President of the United States.
Here are some highlights from this past week's 
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Before the bell: Wall Street headed higher; automakers, retailers in focus
Waiting for the other shoe to drop: The looming credit crisis
Bet on T&A with J&J (JNJ)
