Back in the early 1990s, the U.S. was mired in a recession and the money center banks were in dire straights. But, of course, it was a great opportunity for investors.
So, are we seeing a repeat? Perhaps so, although, you still need to tread carefully. This is according to a front-page piece in Barron's [a paid publication].
And yes, this week has been particularly encouraging, as seen with a widespread rally in the financials. It certainly helped that there was strength from Wells Fargo (NYSE: WFC) and JPMorgan (NYSE: JPM). At the same time, the results from Citigroup (NYSE: C) weren't as bad as expected.
By any measure -- such as price-to-book values and P/Es -- the financials look extremely cheap. Besides, these companies are taking quick medicine in terms of write offs. In other words, once financials report next year, the comparisons should look strong.
Something else: the Securities and Exchange Commission has implemented new rules on short selling (regarding 19 financial companies). Ultimately, this may relieve some of the volatility.
DealBook reports that JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon let out some bad news on JPMorgan's conference call today. Despite beating estimates, DealBook reported that JP Morgan's highest quality, so-called Prime mortgages, were, as Dimon said, "terrible, and we're sorry. We can say it eight times. It looks terrible."
Prime mortgages are not supposed to behave like subprime ones. But disappointment seems to be the big theme with the mortgage industry. Prime mortgages barely defaulted at all in the second quarter of 2007 -- JPMorgan wrote off 0.05% of them a year ago -- taking a $4 million charge. But in the same quarter of 2008, JPMorgan wrote off 0.91% -- and charged off $104 million.
And Dimon expects those Prime losses to triple -- to $300 million. If there's any good news, that $300 million is a mere 15% of the net income it earned this quarter. Still, it suggests the depth of the economic problems that lie ahead.
Good morning, ladies and gentlemen and welcome to the JPMorgan Chase Q2 2008 earnings call. This call is being recorded.
Today's presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements reflect management's current beliefs and speak only as of the date hereof.
In addition, such statements are, by their nature, subject to significant risks and uncertainties and the firm's actual returns may differ materially from those described in such forward-looking statements. Please refer to JPMorgan Chase's filings with the Securities and Exchange Commission, including its most recent Form 10-K and Form 10-Q for a description of the risk and factors that could cause the firm's results to differ materially from those described in the forward-looking statements.
TheStreet.com's Jim Cramer says if we get fed support for a housing bottom, we can really turn things around.
If I were at Wells Fargo (NYSE: WFC) (Cramer's Take), today would be a day where I issued several billion in preferred stock or I issued a multibillion equity offering. Why? Because the deed is done; the shorts panicked and covered and took the stock up where it could now be worth doing a deal.
If things are so great at WFC, why do they have to do a deal? Simple: They have a big increase in nonperformers, and when you have a big increase in nonperformers ,you raise capital. Period.
Yesterday's relief rally was not about housing prices bottoming -- I think that will happen next year, not this year -- it was about getting the shorts. The shorts had had their way all over everything. Suddenly you get this surprise smackdown by Chris Cox of the so-called naked shorts -- it's really not at all about that if these stocks aren't hard to borrow -- and you get a dividend boost, something that shorts don't like to pay.
Reuters reports that today is a big one for bank and technology earnings. It looks like Merrill Lynch (NYSE: MER) will lose big and will try to soften the blow with an announcement about selling its 20% of Bloomberg LP for $4.5 billion to its founder, New York mayor, Michael Bloomberg. JP Morgan Chase (NYSE: JPM) and a handful of big technology companies are expected to report profits. But will they be enough?
Meanwhile, how can we make sense of yesterday's 276 point rally on Wall Street? Nobody knows what happened, but theories abound: the price of oil fell -- possibly due to anticipation that the Fed would raise interest rates to deal with inflation that is roaring out of control. Higher interest rates would strengthen the dollar, which would drive down the price of oil since it's traded in dollars. But I think yesterday's market was a short-covering frenzy. With the SEC foolishly squeezing the shorts, they needed to cover their bets that financials would fall further. Of course good news from Wells Fargo (NYSE: WFC) didn't hurt.
Today's earnings -- with estimates courtesy of a Reuters analyst survey -- are likely to move the market. Here's a roundup:
Merrill Lynch is expected to lose $1.94
JPMorgan was expected to make $0.44, down 63% from 2007. At a Price/Earnings to Growth (PEG) ratio of 0.4 and a P/E of 12 on earnings forecast to grow 31% to $3.34 in 2009, it looks cheap. CNNMoney reports it made 54 cents -- well ahead of expectations and its shares are up 5% in premarket.
Microsoft Corp. (NASDAQ: MSFT) will earn 47 cents a share, a 21% increase from last year. At a PEG ratio of 1.1 and a P/E of 15 on earnings forecast to grow 14.3% to $2.16 in 2009, it looks reasonably priced.
With shares in Lehman Brothers (NYSE: LEH) losing another 14% of their value Monday, and the stock trading under $13, rumors are swirling as to what the bank is planning to do. While there has been speculation that the bank may be taken private, an option that I think is very interesting, others have said that another bank is going to swoop in and take over the company. At the discount levels the stock is trading, that may make sense. The only problem is who the buyer will be.
MarketWatch has an interesting article about this issue and the claim is that there really is no one out there to make a bid for the struggling investment bank. The article quotes Jeff Harte, a securities industry analyst at Sandler O'Neill & Partners, " I'm hard pressed to give you many viable buyers of Lehman. Most large banks are focused on their own capital issues. Even if a bidder did come forward, it would have to win over a lot of Lehman employees -- who control around 30% of the stock -- or risk losing them once the deal was complete."
The most obvious suitor would be JPMorgan (NYSE: JPM), but it has its hands full with Bear Stearns. Other banks like Citigroup (NYSE: C) or Wachovia (NYSE: WB) are fighting for survival. That leaves us with European banks, many of whom are also trying to stay afloat. One bank that has the money needed to finance a deal could be Deutsche Bank (NYSE: DB). It could be interested in a deal as it would gain a foothold into the fixed-income desk at Lehman. The only problem is that the bank is focused on growing its retail banking franchise, not investment banking.
Which leaves us with the first option as the best one. Go private. Clean up the balance sheet, get profitable, wait a few years for the financial storm to pass, and go public once again.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/15/08.
After the implosion of IndyMac Bancorp (NYSE: IMB) and news of the deterioration of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) last week, there's bound to be a certain level of trepidation as the earnings crunch begins this coming week and many big financial companies report. Here's a look at what Wall Street was expecting (see The week in preview: Expectations as the earnings crunch begins for expectations of other reporting companies.)
Analysts surveyed by Thomson Financial are expecting the following of companies to report lower earnings when compared to the same period of the previous year.
According to people familiar with the discussions, the Wall Street Journal reported that Microsoft Corporation (NASDAQ: MSFT) has held discussions with Time Warner Inc (NYSE: TWX) and News Corporation (NYSE: NWS), among others, about joining it in a deal that could lead to the breakup of Yahoo! Inc (NASDAQ: YHOO). Some of the sources said the preliminary talks are unlikely to result in a deal with Yahoo!
Johnson & Johnson (NYSE: JNJ) is reportedly in exclusive talks to sell its wound-care business Ethicon to the private-equity arm of JP Morgan Chase & Co (NYSE: JPM), according to the Wall Street Journal. Terms of the potential deal were not disclosed.
OTHER PAPERS:
Sources familiar with the inquiry said that the Justice Department has opened a formal antitrust investigation into a deal that would allow Google Inc (NASDAQ: GOOG) to provide some search advertising for Yahoo!. The Washington Post reported that investigators will demand documents from Google and Yahoo!, as well as other large companies in the media and Internet industries.
WEB SITES:
Reuters reported that regulators in the European Union are looking at the long-term effects of BHP Billiton Limited's (NYSE: BHP) $170B bid for Rio Tinto Group (NYSE: RTP). Sources familiar with the EU questionnaire said regulators have asked competitors and customers about effects of the deal on their businesses through 2015.
Anheuser-Busch Companies Inc (NYSE: BUD) is going to turn down InBev's unsolicited $46.35B takeover offer and that may come before week's end, the Wall Street Journal reported. InBev is then expected to pursue a hostile takeover and Anheuser will say the offer undervalues the company. Instead, Anheuser will attempt to boost its share price by selling non-core assets such as its theme parks.
The Wall Street Journal also reported that Belgian-Dutch financial firm Fortis NL (OTC: FORSY), in a move to increase its solvency, will attempt to raise $12.54B, and will also cancel its interim dividend and sell some assets.
The Financial Times reported that the London Stock Exchange, in a joint venture with Lehman Brothers Holdings Inc (NYSE: LEH), unveiled a pan-European equities trading platform to fight rivals that are hurting its market share.
Long Island, NY's Astoria Financial Corp (NYSE: AF) has found a novel way to reduce the number of its nonperforming loans by changing its internal policy on when mortgages are classified on its books as troubled, the Wall Street Journal reported. By counting home loans as non performing when the borrower misses at least three payments, not two, Astoria reduced its non-performers to $69M from $106M in three months.
The Wall Street Journal also reported that the indictments of Matthew Tannin and Ralph Cioffi, two former Bear Stearns hedge-fund managers, are expected to cite a personal e-mail suggesting the funds were "toast," four days before they told investors they had little to worry about. JP Morgan Chase & Co (NYSE: JPM) has said it will cover the legal costs of the fund managers.
Hewlett-Packard Company (NYSE: HPQ) is set to reorganize its printer unit. The Wall Street Journal said that the unit's five business units will be cut down to three to become more efficient at adapting to a marketplace in which consumers are relying less on printing.
According to people close to the situation, the Financial Times reported that Anheuser-Busch Companies Inc's (NYSE: BUD) board of directors is planning to meet this week to discuss the $46B bid from rival brewer InBev.
The Wall Street Journal reported that executives from Ford Motor Company (NYSE: F) informed plant managers and union representatives that they intend to reduce overtime and that additional buyouts of union workers were necessary to cut costs.
The Wall Street Journal also reported that federal prosecutors are preparing to file criminal charges against Ralph Cioffi and Matthew Tannin, two hedge fund managers at Bear Stearns, now part of JP Morgan Chase & Co (NYSE: JPM), with securities fraud.
Investors who helped U.S. financial companies raise capital are currently losing nearly $10B on paper, according to an analysis by the Financial Times.
OTHER PAPERS:
Fortune reported that the materials used to build Apple Inc's (NASDAQ: AAPL) new 3G iPhone could cost as little as $100, while the components of the old iPhone cost $170, according to analysis by Portelligent, an Austin, Texas-based teardown specialist.
Steve Jobs appeared to be extremely thin during the unveiling of Apple's new iPhone last Monday, causing speculation by observers. Fortune speculated that Jobs' weight loss over the years is being caused by a complex operation he underwent in 2004, in order to treat a rare type of pancreatic cancer.
Verizon Wireless, a joint venture of Vodafone Group Plc (NYSE: VOD) and Verizon Communications Inc (NYSE: VZ), is in talks to acquire Alltel Corp. in a deal valued at about $27B, the Wall Street Journal reported. If successful, the combined companies would create the largest cellphone company, and would be better positioned to compete against AT&T Inc (NYSE: T).
Gregory B. Penner, the son-in-law of Wal-Mart Stores Inc (NYSE: WMT) chairman S. Robson Walton, is expected to join the company's board of directors, a move seen as the beginning of a leadership change at the company, according to the Wall Street Journal.
The Financial Times reported that Singaporean sovereign wealth fund Temasek refused to provide funds to Bear Stearns shortly before Bear's sale to JPMorgan Chase & Co (NYSE: JPM). Temasek reportedly refused the request for practical and political reasons.
Russia's Interior Ministry questioned the head of BP Plc's (NYSE: BP) Russian oil venture as part of a criminal investigation into possible large-scale tax evasion, the Financial Times reported.
While bank stocks aren't exactly hot, they triggered yesterday's rally because when J.P. Morgan Chase & Co (NYSE: JPM) and Wells Fargo & Company (NYSE: WFC) reported, there were no unexpected surprises, according to the Wall Street Journal's "Heard on the Street". The ups and downs in the sector are expected to continue.
According to people familiar with the matter, the Wall Street Journal reported that Yahoo! Inc (NASDAQ: YHOO) may be moving closer to outsourcing its search advertising to Google Inc (NASDAQ: GOOG) after an initial test yielded what they considered to be positive results.
OTHER PAPERS:
The New York Times reported that AT&T Inc (NYSE: T) is planning today to make an announcement that they will gift $100M to improve the skills of the nation's work force and fight the problem of high school dropouts.
WEB SITES:
Celgene Corporation (NASDAQ: CELG) is best known for its blockbuster drug Revlimid which is used treat multiple myeloma, a cancer which attacks blood and bones. For patients, it can prolong their lives about 2.9 years, or longer, according to Investor's Business Daily's "The New America".
Back in the early 1990s, the U.S. was mired in a recession and the money center banks were in dire straights. But, of course, it was a great opportunity for investors.
and 
. He also operates 
With shares in 
After the implosion of 
.gif){kind=logo}
.gif){kind=logo}
Here are some highlights from this past week's .gif){kind=logo}
Comfort Zone Investing: Exploit volatility with constant dollar investing
Merck earnings preview: No miracles expected
Apple reports Monday -- buy AAPL before earnings?
