Yesterday the Dow Jones Industrial Average was down 225, so I decided to peg the financial stocks I wrote about investing in as a pool. We are often accused of bragging on the good days and having memory loss on the bad so I wanted to be transparent and forthright on the downside.
To my surprise the financial stock pool is actually up 9.96% on average. Six stocks increased in value, two were down and two stocks were even money. The big winner was MBIA Inc (NYSE: MBI) up over 68%!
In the same time frame the DJIA has gone from 11,397.56 to 11,431.43 (even) and the S&P has gone from 1263.2 to 1266.06 last night, for basically no change either.
The market is rebounding as I write so I expect the news is even better. Although, this pool of stocks beat the market so far in the short run, I hope to track this group for a year, or at least until Major League Baseball's spring training opens in 2009.
E*Trade (NASDAQ: ETFC) was fined $1 million by the Securities and Exchange Commission for failing to comply with federal anti-money laundering laws. The company, which did not admit guilt in the enforcement action, will pay an even steeper price over the long term, which is a good reason to avoid the company's stock.
What many investors and members of the press forget about government fines is that the dollar amount does not tell the full story. E*Trade will likely spend far more than $1 million upgrading its computer systems after it failed to verify the identities of more than 65,000 of its customers as required by SEC rules and the USA Patriot Act. Moreover, the company could face countless legal headaches from people whose stolen identities may have been used to set up phony E*Trade accounts. Let's not forget about the money laundering cases involving drug dealers and terrorists whose funding sources were not properly verified because of E*Trade.
The SEC, for one, has found no excuse for E*Trade's inaction to correct the problem, which it knew about for years.
After the market closed last night, with the Dow Jones Industrial Average rebounding from Monday's notable drop and ending the trading day at 11,397.56, up 266.48 (+2.39%), I posted Serious Money: 10 finance stocks as the market bounces. This is the follow-up post listing the full pool of speculative stocks that as a group I believe will beat the overall market in the next 12 months.
The prediction business is thankless and the speculative business is even worse; it is often painful. I usually refrain from this activity but today I play the contrarian in a Sir John Templeton (RIP) sort of way, jumping into the stock market's worst performing sector with both feet. I believe the market is at or near a bottom and this summer is the time to buy.
Looking for a break in the clouds, yesterday I started choosing ten stocks knowing that three or four may go to zero, a few more will survive with modest gains, and three or four will rise, not returning to their old glory soon but more than covering the ones that fail. The first four picks have been bleeding all over Wall Street for a year now and the blood-letting is not done yet.
Initially I was looking for stocks that had fallen at least 70%. After reviewing my figures, I have compromised and changed that to 63% so that I could include some of the major companies like Citigroup Inc. (NYSE: C) that are broadly held and have strong reader interest. Prices are as of July 29, 2008.
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.
Yesterday could have been the end of the NBA season, but the Los Angeles Lakers forced a game six in Boston -- not so much by winning; more by having a "refuse to lose" finish that they could not muster before. I am quite sure David Stern is fine with that outcome. ESPN, and ABC television owned by Walt Disney (NYSE: DIS) must be ecstatic. The NBA officials will earn another paycheck, and the sponsors? They are praying for a game seven for sure!
Yesterday, prior to the game, I posted Sunday Funnies: Lakers/Celtics -- NBA business success, and dedicated much of the word flow to all the clamoring about NBA officiating and reasons why the game had issues. Today is all the about the cash.
While the Super Bowl is the hugest of events, an NBA Finals is a saga with twists and turns, and this one so far has had many. The Lakers face insurmountable odds of winning two games in Boston so they have been as much as counted out already.
Laker star and NBA Most Valuable Player Kobe Bryant has posed the most interesting perspective on the challenge his team faces that I can ever remember. He said, prior to the game, that since he did not go to college he viewed his situation like making the Elite Eight referring to Division I college basketball March Madness. He said, you just have to feel grateful you are there and know that you have to win three games to win the tournament.
The mood this week has changed sharply from the post-GE disappointment, despite weak economics still hitting the screens every morning in economic numbers. In fact, the week went much better than it was looking on Monday, and everyone remembered the old chant, "markets climb up a wall of worry." Even oil heading above the $116 per barrel isn't killing things. Here are unofficial closing levels:
Advanced Micro Devices Inc. (NYSE: AMD) down after reporting a net loss of $358 million on $1.5 billion in revenues. Losses were narrowed from the same quarter last year. The company also released plans to cut additional cost. If insiders want that stock to go up, they need to fire Hector Ruiz. Shares were down 1.6% at $6.09 going into the close.
E*Trade (NASDAQ: ETFC) is naming its chairman, former JPMorgan (NYSE: JPM) vice-chairman Donald Layton, to be the company's new CEO.
The stock was trading up more than 5% on the news earlier, probably because of speculation of a possible sale. The Wall Street Journalreported [subscription required] that "E*Trade and Citadel have discussed the possibility of trying to find a buyer for the home-equity portfolio, which would lift a tremendous burden off E*Trade and could pave the way for a sale of the entire company, according to people familiar with the matter."
But Mr. Layton told the Journal that selling the home-equity portfolio is not an option right now.
I think investors should, as always, be extremely cautious about buying shares in the company on takeover speculation. E*Trade's woes -- and declining share price -- are hardly an unknown entity given its status as a poster child of subprime stupidity. The fact that Ameritrade (NASDAQ: AMTD) and other well-capitalized competitors, which had expressed interest in acquiring E*Trade before its precipitous decline in value aren't stepping up with an offer, tells me all I need to know: there's really no reason to think a deal is coming any time soon.
Last week, I explained why investors should pay no attention to the well-orchestrated insider buying at struggling broker E Trade Financial Corporation (NASDAQ: ETFC) when I said this:
The buying was in all probability coordinated to send a message to investors -- and Wall Street is eating it up. But the reality is that $1.9 million is just not that much money in the context of the amount that the company top executives are paid. The insider buying, in conjunction with the money E*Trade will spend on Super Bowl ads, looks like a pretty desperate and transparent effort by the company to convince investors and customers that the company is OK.
Unfortunately, The Wall Street Journal is bestowing credibility upon this transparent move to restore investor confidence, with an ode to the insider buying in Wednesday's Inside Track column (subscription required). E*Trade spokeswoman Pam Erickson was even gracious enough to provide a quote, telling the Journal that the moves signals that we "have confidence in the turnaround plan we laid out and the future of the franchise."
Of course, back when the stock was trading in the double digits, Ms. Erickson did not say "These sales are a sign of our management's utter lack of faith in their own abilities."
Insider trading can be a good indicator of sentiment, but not when it's such an obviously coordinated effort to drum up stories like the one that appeared in the Wall Street Journal today.
E*Trade (NASDAQ: ETFC) "is a high higher-risk trade, so do not bet the house; however, I believe the opportunity is still compelling," says Ian Cooper in Small Cap Trading Pit.
"About 10 insiders are betting heavy that E*Trade Financial will turn itself around this year. The filings are revealed here:
Hayter, director 4,917 at $4.06
Layton, director 245,800 at $4.06
Fisher, director 31,806 at $4.06
Randall, director 29,500 at $4.06
Parks, director 24,586 at $4.06
Raffaeli, director 12,293 at $4.06
Lilien, acting CEO 7,376 at $4.06
Weaver, director 68,843 at $4.06
Brewster, director 24,586 at $4.06
Willard, director 11,942 at $3.98 and 13,058 at $3.99
"And for them to be buying after a one-month triple digit move speaks volumes on confidence, which may explain the latest surge in option volume. Sure, the stock took a major dive in 2007, but that's because it got itself involved in a business it shouldn't have been in -- subprime.
Professional investors like to use conference call transcripts as a valuable tool in their research toolbox. These are transcribed versions of an actual conference call, usually held publicly over the phone. Instead of listening to the full call, investors can get their hands on these things and read them at their leisure. They're generally full of information asked by both analysts and professional investors.
Okay, and then, just finally, so far in January, the asset intake from E*Trade, is that still running at elevated levels versus historical trends and can you share any TFA data there versus history?
Joe Moglia, CEO, Ameritrade
I think again, for you to have clarity, I think it is appropriate for me to share that, we are not going to give specific numbers, but the numbers that we continue to see with regards to the inflow from them is significantly higher than anything we have ever seen historically.
Of all the egregious executive pay situations out there, the most offensive has to be the huge severance packages handed out to executives who were miserable failures.
Case in point: Former E*Trade (NASDAQ: ETFC) CEO, Mitchell Caplan, who stepped down as CEO after the company reported massive losses on subprime loans it had no business speculating in, will receive $10.9 million in severance pay -- two times his 2006 base salary and bonus.
How could he possibly deserve it? The stock is down to around $3.50 from its 52-week high of $26.08, and it's all because of horrible investments the company made. The CEO should be responsible for those mistakes.
In addition, Caplan's severance package and bonus in 2006 were in all probability inflated as the company had not yet marked down its subprime loans. Exorbitant severance packages combined with big options and restricted stock packages induce executives to take unwise risks with shareholder capital. The ability to reap huge windfalls from gambles that pay off and the huge pay these guys receive when they fail, leads to a decision making process that goes something like this: "Heads, I win and my options are worth millions; tails, I lose and I get $10.9 million and I don't have to work anymore."
Executive pay structures that reward failure threaten the future of our economy. E*Trade shareholders should be demanding the resignation of the entire board of directors that approved this parody of capitalism.
As investors throughout the world get ready to usher in 2008, here is a stock pick that looks like it will be a big winner.
TD Ameritrade (NASDAQ: AMTD), the online broker, looks like it will be the big winner in the E*Trade (NASDAQ: ETFC) fiasco. TD Ameritrade looks to pick up a whole bunch of accounts from the shamed online broker. In addition, after some clarity is shined on just how bad E*Trade's financial situation is, I would expect TD Ameritrade to swoop in and gobble up the retail brokerage business of E*Trade. They are sure to acquire it on the cheap, which makes TD Ameritrade all the more attractive.
With a PE under 19, and the stock trading just off the 52-week high, the stock has been hanging in during a period when the rest of the financials have gotten clobbered. Look for TD Ameritrade stock to be a strong performer in '08.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no position in any stock mentioned as of 12/30/07.
In a move that in a backhanded way says "you made the wrong choice," Morgan Stanley (NYSE: MS) has named competitor Citigroup Inc. (NYSE: C) as their top short pick for 2008. What makes this interesting is that it follows on the heels of Citi naming Vikram Pandit as CEO. Interesting to note that Pandit was a former longtime Morgan Stanley executive. Maybe this is Morgan's way of telling investors that this was a bad choice for CEO. After all, if anyone should be familiar with him, it's Morgan Stanley.
What bothers me about this choice is that they set a price target of $28. That's less than 15% from where Citi stock is currently trading. That's their top short idea? I guess Morgan Stanley believes that the market is going to be moving up by, I don't know, say 50%. That's the only way I can understand how their "Top Short Idea" is a stock that's going to lose only 15%.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer owns stock and is long ETFC. He has no position in any other stock mentioned as of 12/12/07.
Yesterday the Dow Jones Industrial Average was down 225, so I decided to peg the financial stocks I wrote about investing in as a pool. We are often accused of bragging on the good days and having memory loss on the bad so I wanted to be transparent and forthright on the downside.
Yesterday could have been the end of the NBA season, but the Los Angeles Lakers forced a game six in Boston -- not so much by winning; more by having a "refuse to lose" finish that they could not muster before. I am quite sure David Stern is fine with that outcome. ESPN, and ABC television owned by 
Professional investors like to use conference call transcripts as a valuable tool in their research toolbox. These are transcribed versions of an actual conference call, usually held publicly over the phone. Instead of listening to the full call, investors can get their hands on these things and read them at their leisure. They're generally full of information asked by both analysts and professional investors. 
As investors throughout the world get ready to usher in 2008, here is a stock pick that looks like it will be a big winner. 
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