Thanks to what former Enron CEO, Jeff Skilling, called bad "optics", some top Wall Street executives announced that they're foregoing their normal seven figure bonuses. But I think I am being generous in estimating that those potentially symbolic gestures will only shave a few billion off the Wall Street bonus pool for 2008. We could still be paying $20 billion in bonuses this year.
How so? After buying $159 billion worth of preferred stock in 24 banks, I have not seen any evidence that the Treasury required the banks to lend it out. There is nothing stopping the banks from using the money for paying bonuses. And while the original estimate of 2008 bonuses was down 20% from 2007 -- to $26.6 billion -- I am thinking that eliminating executive bonuses could lead to at least a $6 billion lower figure -- particularly if this cut provides bank CEOs leverage to reduce the amount of bonuses paid to lower level people.
So far, top executives from Goldman Sachs (NYSE: GS), UBS AG (NYSE: UBS), Deutsche Bank, and Barclays have said they will skip their bonuses for 2008. Ironically, the ethically challenged UBS has the most interesting idea -- starting in 2009, it will be able to claw back bonuses in the years after their award with a third paid immediately, while the remainder will be put into a participant's account and can be reduced if there is a loss at the division or the whole bank. I started proposing an escrow account along these lines in October 2007.
Keefe Bruyette upgraded shares of Colonial Bancgroup (NYSE: CNB) to Outperform from Market Perform on valuation following the recent weakness and believes the company will be eligible to receive TARP funds. Morgan Stanley believes the company's valuation adequately reflects risk to the loan portfolio; the firm raised shares to Equal Weight from Underweight.
Merrill upgraded Ericsson (NASDAQ: ERIC) and ASML Holding (NASDAQ: ASML) to Buy from Underperform and believes their valuation reflects the worst-case for bad news.
Oppenheimer upgraded Trimble Navigation to Outperform from Perform on valuation as they believe the company's long-term growth story is intact.
Celestica (NYSE: CLS) was upgraded to Sector Outperformer from Sector Performer at CIBC.
KeyCorp (NYSE: KEY) was added to Goldman's Conviction Buy List.
UBS cut Barclays (NYSE: BCS) to Neutral from Buy as they believe capital raises could negatively impact earnings and that the dividend is likely to be cut.
JP Morgan downgraded Discovery Holdings (NASDAQ: DISCA) to Underweight from Neutral based on valuation and the deteriorating economic outlook.
Friedman Billings downgraded shares of Janus Capital (NYSE: JNS) to Underperform from Market Perform and lowered its target to $7 from $23 as they see further risk to the downside following the company's weaker-than-expected results.
LKQ Corp (NASDAQ: LKQX) was cut to Sector Perform from Outperform at RBC Capital.
Affymetrix (NASDAQ: AFFX) was lowered to Sell from Hold at Deutsche Bank.
RightNow Tech (NASDAQ: RNOW) was downgraded at Baird to Neutral from Outperform.
This post is part of a series in which TheStockAdvisors.com asked financial experts to name their top stock pick if McCain or if Obama wins the election.
"McCain, a friend of Wall Street, would encourage investing through tax breaks, which ultimately means more profits for Barclays (NYSE: BCS), the British bank that has acquired Lehman Brothers' U.S. investment banking assets," notes Vivian Lewis in her Global Investing.
"Barclays is now investing hugely in the business of U.S. investing, having picked up the investment banking and asset management businesses of Lehman.
"Barclays got a bargain, cherry picking the bits of Lehman worth the most, including the HQ building in NY. It was required by British regulators to immediately issue a program for financing the acquisition to reassure markets worried about capital sufficiency.
"The new assets will beef up Barclays' U.S. presence (and its U.S. risk). The British bank already is a major player in the issuance of Exchange Traded Funds, a cheap and popular 21st century investment mode.
"Adding Lehman to the pot will further boost its prowess in this special part of fund management. Then too, the international connection will probably result in new business in managing money for other investors like high-net worth individuals.
This post is part of a series in which TheStockAdvisors.com asked financial experts to name their top stock pick if McCain or if Obama wins the election.
Which stocks would benefit from a victory by either Senator John McCain or Senator Barack Obama? To help investors sort through the sectors and stocks best positioned to benefit in a post-election environment, we posed this question to some of the nation's leading financial newsletter advisors.
Importantly, this is not a partisan report; each participating advisor has provided a favorite stock for both candidates, focused not on political preferences but unbiased stock analysis. Below we feature those stocks and ETFs that the advisors believe will be the winners depending on which candidate prevails.
After being downgraded by Moody's, The Wall Street Journal reported that MBIA Inc (NYSE: MBI) will have to make $2.9 billion in termination payments and put up an additional $4.5 billion in collateral on agreements called Guaranteed Investment Contracts. As a result the firm is selling municipal bonds to raise cash.
Anheuser-Busch Companies Inc (NYSE: BUD) introduced a new business plan to help thwart a takeover by rival InBev. As part of its plan, The Wall Street Journal reported its intention to reduce headcount, raise prices and buy back more of its shares.
In an attempt to withstand the economic slowdown, the Financial Times reported that Siemens AG (NYSE: SI) announced plans to cut 17,200 jobs worldwide. Approximately 6,400 job cuts will be in Germany with a third more, elsewhere in Europe.
The Financial Times also reported that Citigroup Incorporated (NYSE: C) is planning to change its bonus system for hundreds of its top managers, in an attempt to increase cooperation and reduce competition within the company.
OTHER PAPERS:
John Varley, the CEO of Barclays Plc (NYSE: BCS), said the GBP4.5B rights issue answered naysayers, and said in an interview with The Sunday Telegraph that extra financing will not be necessary.
It may all be doom and gloom in the U.S., but the heads of two of Europe's largest banks believe that the economy is over the worst of it.
The head of France's biggest listed bank, BNP Paribas, told Italy's La Repplica newspaper, "The worst should be over and I think that from the second half onwards the crisis should normalize: that is, the phase of exceptional turbulence on the markets should end."
Over the the UK, the news was nearly as good. The head of Barclays (NYSE: BCS), the biggest bank in the UK said that the 4.5 billion pounds the bank had raised was adequate to get it though the crisis, according to The Telegraph.
Both men may be bank CEOs, but they may be wrong. A growing number of analysts see bank and brokerage earnings getting worse in the second quarter and even into the second half of the year. The primary reasons behind growing financial company balance sheet problems, especially the mortgage crisis and LBO loans, may be becoming more troubled and not less.
If the economy tips into a deep recession, banks will find themselves further damaged by loans from every sector going into default. That means more write-offs, which means more raising of capital and further shareholder dilution.
CEOs at big banks were singing the same tune in May. It turned out not to be true.
Barclays (NYSE:BCS) become the most recent bank to raise billions of dollars, bring in $8.8 billion from investors including the sovereign funds in Qatar and Singapore.
"Through our capital raising ... we strengthen our capital base and give ourselves additional resources to pursue our strategy of growth through earnings diversification," Barclays Chief Executive John Varley said, according toThe Wall Street Journal.
That is a nice way to say the bank was running out of money.
The news says more about the future than it does the past. A bank as large as Barclays would not raise such a large sum if it believed the credit crisis was largely over. The firm clearly expects more fall-out from mortgage-related paper and LBO loans. Why else dilute the shareholders?
At least the fact that large funds will still put money into banks is good news.
If the tea leaves from the bank's actions are correct, the opinion among many Wall Street analysts that the financial crisis will extend into next year is right.
Douglas A. McIntyre is an editor at 247wallst.com.
As Lehman Brothers Holdings Inc (NYSE: LEH) is about to report a second quarter loss of about $2B, the firm is closing in on raising over $5B in new capital, the Wall Street Journal reported. Once source of Lehman's new funding is reportedly the New Jersey Division of Investment.
The Financial Times reported that General Electric Company's (NYSE: GE) NBC Universal and British private equity firm GMT Communications Partners are expected to soon acquire Bigpoint, a German-based computer games website.
OTHER PAPERS:
According to the Independent, the credit crunch has cost the jobs of about 100 bankers at Barclays Plc (NYSE: BCS). The bank cut about 20 individuals on the leveraged finance team and will reportedly cut 80 more in investment banking and IT support.
H.J. Heinz Co. (NYSE: HNZ) is today expected to increase its sales and profit projections for the next two years, as it reports results of its fiscal year ended April 30. The Wall Street Journal reported that sales are to grow 6% or higher from 4%, while earnings per share growth for the next two years is projected to grow between 8% and 11% from the earlier projection of 7% to 9%.
It appears that Vistaprint Limited (NASDAQ: VPRT), a graphic design services and printed products company, counts on referral fees from pop up rewards programs on it website for a certain amount of its revenue and profit and also relies on the referral of its customers to outside firms offering rewards programs, which turns out to be a monthly fee for services such as discounts on movies and amusement parks, according to the Wall Street Journal's "Heard on the Street". Some believe the stock, whose shares have plummeted over concerns of slowing revenue and slimmer gross margins, may be trading too high for its own good.
According to people familiar with their plans, the Financial Times reported that the CEOs of UAL Corporation's (NASDAQ: UAUA) United Airlines and US Airways Group (NYSE: LCC) will today meet to discuss the carriers' potential merger agreement.
OTHER PAPERS:
The Independent reported that for the second time this month, Barclays Plc (NYSE: BCS) revised lower its calculation of analysts' consensus for its full-year profit, cutting its 2008 figure by nearly 8% to GBP5.876B pre-tax; Barclays cut the calculation 15% two weeks ago.
Last December Chemtura Corporation (NYSE: CEM), a specialty chemicals company with a market cap of about $1.9B, said it might sell itself, and now The Blackstone Group LP (NYSE: BX) and Apollo Management are in talks to buy the company, the Wall Street Journal reported.
In part one of a series to help explain the reasons why The Bear Stearns Companies (NYSE: BSC) collapsed, the Wall Street Journal said that the troubled firm was torn apart by executives who couldn't agree on what course to take, including raising capital and slicing mortgage and related bonds from its inventory. And each of about six attempts to raise capital fell part.
OTHER PAPERS:
The American investor and Berkshire Hathaway Inc (NYSE: BRK.A) chief Warren Buffett said the United States is already in a recession that is deeper and will last longer than the public expects, the Economic Times reported.
According to the Telegraph, Barclays Plc (NYSE: BCS) is planning to sell Barclays Life Assurance Company, its life assurance arm, which has over GBP7B of funds under management. Sources believe potential bidders for the unit may include Pearl, Swiss Reinsurance Company (OTC: SWCEY), General Re, Canada Life and XL Re. Market commentators believe that on an embedded value basis, the unit is currently valued at around GBP1B.
The Wall Street Journal reported that a federal judge said that the government had "sufficient evidence" for a jury to conclude that a conspiracy to fraudulently boost the financials of American International Group Inc (NYSE: AIG) began with former CEO Maurice R. "Hank" Greenberg. That led to a transaction that artificially inflated AIG's loss reserves.
Citigroup Incorporated's (NYSE: C) Falcon Strategies fixed income hedge fund is down 75%, the Wall Street Journal reported, bad news for the three U.S. banks that invested in it to help increase returns on employee life insurance. One of the banks, Fifth Third Bancorp (NASDAQ: FITB), is suing Transamerica Life and Smith Barney, both of whom helped to arrange the investment, and some are now questioning whether Citigroup will be forced to give back some of the investments as they have with individual investors.
After it stopped offering some mortgages last month because it was swamped by volumes of new applications, the Financial Times reported that First Direct, a unit of HSBC Holdings Plc (NYSE: HBC), has resumed lending to new customers. The bank said it has continued to receive "significant interest" in its mortgages from existing customers.
OTHER PAPERS:
In an effort to raise capital from shareholders, the Telegraph reported that Barclays Plc (NYSE: BCS) is considering a takeover bid for a rival in the U.S. or UK. Sources believe Barclays may attempt to acquire an investment bank, a struggling bank or a deal in a fast-moving economy. Potential names mentioned include UBS AG (NYSE: UBS) and Lehman Brothers Holdings Inc (NYSE: LEH).
Barclay's (NYSE: BCS) stock is falling today after the company announced a 1.1B GBP loss for Q1, including a 1.7B GBP charge, mostly related to write-downs of credit market losses. The company also did not announce rights issue to raise capital, which has surprised analysts. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BCS.
After hitting a one-year high of $61.55 in July, the stock hit a one-year low of $31.31 in March. This morning, BCS opened at $32.44. So far today the stock has hit a low of $32.35 and a high of $33.17. As of 12:25, BCS is trading at $32.97, down 0.34 (-1.0%). The chart for BCS looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $40 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 7.5% return in four months as long as BCS is below $40 at September expiration. Barclays would have to rise by more than 21% before we would start to lose money. Learn more about this type of trade here.
BCS hasn't been above $40 by more than a little bit since January and has shown resistance around $37 recently. This trade could be risky if the financial markets execute a turnaround, but even if that happens, this position could be protected by resistance BCS might find at $40, where the stock has topped out twice int he past two months.
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 BCS.
Thanks to what former Enron CEO, Jeff Skilling, called bad "optics", some top Wall Street executives announced that they're foregoing their normal seven figure bonuses. But I think I am being generous in estimating that those potentially symbolic gestures will only shave a few billion off the Wall Street bonus pool for 2008. We could still be paying $20 billion in bonuses this year.
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