"So far, the financial sector has written off more than $300 million in assets. By some accounts the damage will rise to $1 trillion or more before all is said and done.
"The selloff, which at its nadir was marked by a 55% year-over-year decline in the KBW Index, pushed the constituent members down to a collective 0.64 times book value and a dividend yield of 9%.
"At those levels, either the world is coming to an end or there are tremendous bargains for investors with the courage of their convictions. Looking hard at the data, we can only conclude the latter is the case, provided you're careful with your investment choices.
In spite of the recent selloff in the energy sector, most of these stocks are still trading with big gains on the year. This stands in sharp contrast to stocks from the financial sector, which have suffered steep losses as big banks have been forced to liquidate assets and raise capital to support their balance sheets.
Because these two groups of stocks have functioned as polar opposites during this stretch, it has provoked many conversations about which is currently the more attractive investment destination; high-flying energy stocks or beaten down financial stocks.
Its All About Earnings
When you take a look at the earnings picture, this argument becomes very one-sided.
Crude prices have recently dipped lower, but they are still very high when compared to historical norms, and this will translate into big earnings for energy companies. We can see this dynamic expressed through analyst estimates.
Encore Acquisition Co. (NYSE: EAC) shares are still trading up sharply on the year in spite of the stocks recent sell off, but estimates have risen in tandem with the stock price, with the current-year estimate advancing to $5.07 per share per share from $3.63 per share 90 days ago. This kind of earnings power provides plenty of fundamental strength for more share appreciation.
TheStreet.com's Jim Cramer says Rich Pzena has a different take on the value of the beaten-down financial sector.
If you think the world is coming to an end, you might as well read Rich Pzena's note from Pzena Investment's (NYSE: PZN) (Cramer's Take) earnings call -- he talks about how the world just might not be ending.
Rich has done excellent work his whole career and, in full disclosure, is a friend, and I don't seek out or have many friends on Wall Street. It makes the job -- telling the truth as I see it -- a little too hard.
Anyway, Rich has been wrong, or early, or whatever you want to call it, on the financials. Someone like Doug Kass, who has been dead right on the financials, might take umbrage to my even mentioning Rich's work, but Rich deserves respect for his unbelievably great work over the years.
I liked his conference call because no punches were pulled. He just admitted plain up that his quarter was awful, just terrible, as befits a money management company that invests in value, which now means the financials.
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.
There are clearly some banks, thrifts and other financial institutions doing better than others. That became clear in the most recent earnings releases. Wells Fargo & Co. (NYSE: WFC) showed a profit. True, lower than last year but that was expected. What wasn't expected was better revenues and lower losses. JPMorgan & Chase & Co. (NYSE: JPM) had a similar story. So did Bank of America Corp. (NYSE: BAC). Citigroup (NYSE: C) gave better than predicted numbers. Those were the good announcements.
Not doing so well is Wachovia Bank (NYSE: WB). That loss was much larger than analysts projected. The bank cut the dividend, as expected. The stock gave up more ground.
"The financial sector got a boost after our Wells Fargo (NYSE: WFC), a buy recommendation in our model income portfolio, reported better-than-expected earnings," notes Jack Adamo.
The editor of Insiders Plus, explains, " While Wells, like virtually every other bank, is dragging its heels a bit on recognizing losses on bad mortgages, there were elements of the report that were unquestionably great.
"In its latest quarterly report, Wells Fargo reported:
• Revenues were up 16% year-over-year. • Average loans were up 18% year-over-year. • Net interest margin was 4.92%, up 23 basis points from Q1 • Net interest income increased 21% year-over-year.
"The fact that Wells is one of the few banks that is still well-capitalized enough to write loans was a large contributor to its increase in revenues.
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.
"Since the market started its downturn early this year, I have avoided all financial stocks and resisted the temptation of value plays," says Dave Dyer.
In his Dave Dyer's Newsletter, he explains, "Well, it is now time to violate both of those prohibitions at once." Here, he looks at a new buy for SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, the nation's largest provider of college loans and savings programs."
"There must be some financial areas that have predictable, growing demand, willing customers who actually have low default rates, and securitization processes that do not involve the type of financial engineering that is only intended to hide risk.
"Well, there is such an area, and it even involves a product that it makes sense to finance since it will actually increase in value over time. I'm talking about student loans.
"If you own a television, chances are you're quite familiar with the infamous squawking duck in Aflac's commercials. Aflac has also been in the news lately as the first American company to give shareholders a 'say on pay', or the ability to vote on executive compensation.
"Less well known, however, is Aflac's huge presence in the Japanese insurance market. In 2007, roughly 75% of the company's pre-tax operating earnings were generated in Japan.
"Alfac has been doing business in Japan for more than 30 years, and one in four Japanese households has an Aflac insurance policy. In Japan, Aflac sells healthcare policies for certain things that aren't covered by the national healthcare system, as well as life insurance. And, yes, they have a talking duck in their ads over there too.
"At a time when many financial companies are reporting massive write-offs, Aflac reiterated its target of 15% earnings growth this year, and double-digit growth in 2009. Aflac Japan is doing its part to help drive this growth with 19% operating earnings growth in the first quarter of 2008."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
Monday was an extremely trying day for my portfolio and me. Talk about depressing. Let's see, CapitalSource (NYSE: CSE) took a dive of almost 15% on hellishly high volume (it traded more than 17 million shares on Monday, and AOL Finance lists the 30-day average volume as being a little under 3 million shares) on news about a money-losing sale of assets. Now, once I saw CapitalSource moving down, I knew that Newcastle Investment (NYSE: NCT) wasn't going to be trading higher. Sure enough, there was indeed something new at Newcastle. A new 52-week low. The stock closed Monday at $7.06, down 10% and one penny above the low. And then there's MFA Mortgage (NYSE: MFA). It too was down, although only about 2%. Yeah, only. All of these stocks are at prices well below my cost basis.
I'm at that weird crossroads all investors find themselves at some point. Is it too late to sell? Let me tell you, I don't want to be one of those panic sellers who regrets dumping his stocks because as soon as he does so they start to rise. But, I don't want to be one of those holders who doesn't know when enough is enough. It's pretty rough. You don't know whether to add to positions that are faring poorly and thus risk throwing away money, or whether to avoid adding money and thus risk not getting some bargain prices. And in terms of Newcastle, my colleague Sheldon Liber is with me on this. He thinks the stock may turn out to be a value. See this article.
My other colleague, Timothy Sykes, has counseled me to instead focus on strong stocks that are working. I can't say he doesn't have a point. Indeed, my portfolio does seem rather masochistic. For now, though, I will try to avoid any emotional decisions. I am going to continue to watch the financial carnage as it further unfolds and evaluate every potential stock trade very carefully. This summer is going to be a tough one. I'll let you know what happens.
Disclosure I own CapitalSource, MFA, and Newcastle Investment; positions can change at any time.
The model portfolio of Insiders Plus gains 48% last year; here, editor Jack Adamo reviews two of his portfolio holdings -- both bank stocks being accumulated by Warren Buffett's Berkshire Hathaway.
"U.S. Bancorp (NYSE: USB) reported a slight decrease in Q1 earnings of 62¢ per share versus 63¢ last year; the shares rose 2.8% the next day. Compared to the disastrous results of its peers, this small decline in earnings was a home run.
"That's a testament to the company's savvy managers. USB steered clear of the toxic problems that choked most banks. Only 2.7% of its loans are subprime.
"Warren Buffett's Berkshire-Hathaway continues to buy the stock steadily. Recent SEC filings show that in the fourth quarter of 2007 Berkshire increased its share of the Minneapolis-based bank by 3 million shares to a total of 75 million.
"This represents 4.4% of its shares outstanding, and up tremendously from its stake of 23 million shares just a few years ago. The Wizard of Omaha knows what he likes and why he likes it.
"Meanwhile, Wells Fargo & Company (NYSE: WFC) reported Q1 earnings of 60¢ per share down 9% year-over-year, but up 46% from the December quarter. Like USB, Fargo shares continue to be accumulated at Berkshire Hathaway.
"The stock is a solid long-term buy, with good prospects of steadily raising its 4.2% dividend. It has capital appreciation potential to boot, especially after the housing hangover abates."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
"When I evaluate the underlying fundamentals in the financial sector, I find myself ready to back up the truck," notes Louis Basenese, editor with The Oxford Club. Here he looks at a financial ETF.
"Recently GE shocked the world when it missed earnings expectations by seven cents because of difficulties in its financial services business, the seventh largest in the United States. Then Wachovia posted a worse-than expected $1.1 billion loss.
"Next was Washington Mutual which reported a $1.14 billion quarterly loss, worse than expected. And Merrill Lynch had a quarterly loss of $1.96 billion, also worse than expectations.
"Not to be outdone, the bottom of the line-up, regional banks (Comerica Inc., KeyCorp and PNC Financial Services Group) also struck out, reporting worse than expected first-quarter net income and/or mounting credit-loss provisions and net charge-offs.
"Remarkably, the Financial Select Sector SPDR (ASE: XLF) has barely budged. Indeed, its 15% higher than where it was when Bear Stearns collapsed.
"Almost untouched by the subprime scandal and the subsequent credit fallout, Canada's banks are strong and their risk of writeoffs are consider by most analysts as minor," notes Genia Turanova and Gregory Dorsey in Leeb's Income Performance Letter.
"Toronto-Dominion and its subsidiaries, collectively known as TD Bank Financial Group, serve more than 14 million customers. The group offers a full range of financial products and services including wholesale banking securities, personal and business banking, wealth management and U.S. personal and commercial banking.
"TD Bank is looking to expand its US presence by acquiring New Jersey-based Commerce Bancorp. After the acquisition is completed, TD's US banking operations will double. As for the hot topic of all financials these days – its subprime exposure – Commerce Bancorp's $16 billion loan portfolio has no subprime exposure.
"The indiscriminate sell-off in the financial sector has left some banks at valuations that haven't been seen in 20 years," says value investor Nathan Slaughter.
In his Half-Priced Stocks newsletter, the advisors looks to one out-of-favor favorite among banks: Minneapolis-based U.S. Bancorp (NYSE: USB). Incidentally, he notes that Warren Buffett recently added to his position in the banking stock.
"US Bancorp is the nation's sixth-largest bank in terms of assets, with nearly $238 billion at last count. The firm operates over 2,500 branches in 24 states, mostly in the western and midwestern parts of the country, including an established presence in key markets such as St. Louis, Denver and Seattle.
"Over the past year, the company has seen solid increases in both loans and deposits. More importantly, it paid out just 3.8% on those interest-bearing liabilities, far below what it earned on loans and other investments -- with the net interest margin expanding to 3.91%.
"And, that rate could move even higher in the coming months thanks to a more favorable interest rate environment. And as for credit quality, U.S. Bank remains at the very top of its peer group.
It's been a tough first four months of the year for Bill Miller of the Legg Mason Value Trust (LMVTX), famous for his 15-year run beating the S&P 500. Even after a 4.12% bounce in his fund's net asset value on Thursday, he's down 14.95% for the year. One major culprit? His stake in Bear Stearns (NYSE: BSC) that was once worth more than $200 million, making the fund one of the firm's largest shareholders.
According to the Wall Street Journal (subscription required), Miller's performance reminds him of his tough run that began the 1990s: "Back then, a similar crisis was unfolding in financial markets and Mr. Miller eventually swooped in to buy money-center banks like Chase Manhattan and Citicorp that he thought were underpriced, as well as insurance companies and mortgage lenders. Financials made up as much as 45% of Mr. Miller's portfolio by the mid-1990s, and helped drive his 15-year winning streak as they rallied over the years."
Mr. Miller told his fund's shareholders that "the past two years are a lot like 1989 and 1990," and there's a "reasonable probability the next few years will look like what followed those years."
Maybe so. But investors should be wary of the fact that a big part of Miller's outperformance stemmed from his exposure to financial stocks and now that same exposure is dragging his fund into the lowest echelons of mutual fund performance.
Is the Legg Mason Value Trust just a glorified bet on the bounce back in financials? If so, investors may want to tread carefully, as Miller has been wrong about the sector for awhile.
Michael Vodicka, 
After the market closed last night, with the 
Ted Allrich is the founder of 
After the implosion of 
Does GM deserve a taxpayer bailout?
Boeing could lose $3.5 billion per month if machinists strike
Cramer on BloggingStocks: Dell loses its Street cred once again 
