TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.
They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.
Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.
It has been a tough year for investors. We have been dealing with recession fears, housing market worries, high gasoline prices and a very weak U.S dollar. As much as we would love to say that the worst is behind us, we still could be in for some more rocky times ahead. So its best to try to figure out which stocks would be best to avoid for the time being.
Richard Gibbons wrote up a nice piece over on The Motley Fool that looks at some of the stocks that we would be wise to stay away from at this time. Regardless good or bad times, he is convinced there are always ways to make money, but in order to find the winners, it is also necessary to pull out the losers.
So how can we separate out the winners from the losers?
Gibbons seems to have a simple answer for this. He believes there is really no use in wasting our time trying to separate the winners from the losers as there are so many great cheap stocks that could offer us a chance to make money. Gibbons' advice is to not choose ugly and risky companies that could put our hard earned money at risk. To makes this clear, he uses a baseball analogy, expressing his options for the curve balls instead of the fastballs.
The Seattle-based bank lost more than $1.1 billion, or $1.40 per share, compared with a profit of $784 million, or 86 cents per share, in the first quarter of the previous year. Analysts polled by Thomson Financial had forecast a loss of $1.05 per share.
Washington Mutual said it needed to set aside $3.5 billion to cover bad loans in its $250 billion portfolio during the period. The bank set aside less than half as much to cover bad loans in the year-ago period.
While shares closed up 3% to $10.66 in regular trading Tuesday, they fell in after-hours trading.
CSX said it earned $351 million, or 85 cents per share, compared with $240 million, or 52 cents per share, in the previous year. Revenue rose 12% to $2.7 billion. Analysts surveyed by Thomson Financial had forecast 74 cents per share on revenue of $2.63 billion.
The company also said it expects to reach the "upper end" of its previous full-year guidance of at $3.40 to $3.60 per share.
Shares closed up 66 cents to $57.77 on Tuesday, then surged an additional $1.35 in after-hour trading.
How in the world did they get into such hot water? I mean, it takes real talent to lose this kind of money. Buying at the highs, over-leveraging and using poor investment disciplines. Why does it all sound so familiar?
Perhaps it is because these are the phrases that come to mind when I think of the plight of the individual investor who rode the market rollercoaster of the early 2000s. Yet, what I am discussing is not about them at all. No, they learned a hard and costly lesson when March of 2000 came in like a lion Saber-Tooth Tiger and continued downward with a bloody vengeance for the next two years. No, no ... they learned their lesson.
I am referring to the scores of poorly run banking and brokerage operations that have managed to make all of the combined post-depression market catastrophes look like a Sunday walk in the park. Maybe it is not entirely their fault, but they need to take a good portion of the blame for much of our economy's problems related to their poor decisions and lack of oversight on the millions of mortgages and loans that were improperly underwritten.
We already know that though. It is the most recent bit of news that is causing me to wonder how deep of a hole we are really in. This weekend, news for both Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) tells of desperate attempts by companies with big problems looking to bring in life-saving cash infusions. Unfortunately, both deals have the potential to really hurt shareholders. If you hold positions in either one of these fine messes, maybe it is time to consider alternative opportunities.
Call me old fashioned, but the weekend business news releases are starting to get to me.... While it is well known that Washington Mutual is in big trouble as its business is suffering the after-effects of all sorts of bad business practices, it did appear as if the TPG bailout would provide some relief until the credit markets regrouped. But as reported by the WSJ today, that deal stinks to high hell. Shareholders may wake to an ugly pre-market quote for WM as it is now being revealed that part of the TPG deal includes giving away somewhere in the neighborhood of $1.8 billion ... give or take a hundred million or so in order to get the deal done.
When's the worst time to raise money? Well, of course, when you desperately need it.
That's the predicament for Washington Mutual Inc. (NYSE: WM), which needs to shore up its beleaguered balance sheet. Rejecting a buyout offer from JPMorgan (NYSE: JPM) for $8 per share, WaMu has instead opted for a $7 billion capital infusion from an investor group that includes private equity maestros, TPG.
Unfortunately, the deal is extremely dilutive. In fact, a Goldman Sachs (NYSE: GS) analyst -- James Fotheringham -- thinks that investors should actually short the common stock of WaMu and buy the company's bonds.
It's a bold call -- but seems to make sense. The capital infusion should be a back-stop on the bonds. At the same time, there is likely to be more problems in WaMu's core business, as the economy continues its sluggish ways.
Simply put, Fotheringham thinks that WaMu shares should trade at its tangible equity value, which is estimated at $9.84 per share. Plus, he thinks there will need to be about $14 billion set aside for charges on bad loans. Oh, and profits aren't likely to come until 2010, which is an eternity for equity investors.
However, for individual investors, it can be quite risky to short stock. In other words, perhaps the best policy is to stay clear for awhile on WaMu.
The quarter has hardly begun and, with analysts and investors watching nervously, the earnings crunch is about to begin anew. The following 11 big banks are among companies reporting results the week of April 14 to April 18.
These three are expected by analysts surveyed by Thomson Financial to be the the top performers in the first quarter, based on earnings growth from the same period of last year:
With reports that Citigroup (NYSE:C) is close to selling off some $12 billion of leveraged loans and debt, the banking giant is taking a painful but very important step in cleaning up its financial situation. According to Reuters, "The sale would be to private equity firms including Apollo Management, Blackstone (NYSE: BX) and TPG, at an average price slightly below 90 cents on the dollar."
This is important for Citi for two reasons. First, they will end up with about $10 billion in cash to help them get through these tough times. Secondly, the price that they are getting for these bonds is shocking. Who would have dreamed that they could get a little less than 90 cents on the dollar.
Another interesting point is that the private equity group TPG is involved. As my colleague Zack Miller posted yesterday about its investment in Washington Mutual (NYSE:WM), TPG must believe that the banks have bottomed out. Why else would they be ponying up tens of billions of dollars?
It seems to me that we are at or very near the bottom for bank stocks. Long-term investors looking for a turnaround play may want to take a look and do some analysis of the banking sector.
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 4/9/08.
In an effort to increase sales in the Middle East, the Wall Street Journal reported that Dell Inc (NASDAQ: DELL) is in talks with a government-owned vehicle in Dubai called Tecom about establishing a joint venture.
The Wall Street Journal also reported that Washington Mutual Incorporated (NYSE: WM), which obtained a $7B capital infusion from TPG and other investors, had reportedly been working on the TPG deal while negotiating with JP Morgan Chase & Co (NYSE: JPM), which made a preliminary takeover bid of about $7B, people familiar with the deal said.
Citigroup Incorporated (NYSE: C) is close to reaching a deal to sell $12B in leveraged loans at a discount to a group of leading private equity firms, the Financial Times reported. Although details of the deal were still being worked out, inside sources said Apollo Management, The Blackstone Group LP (NYSE: BX) and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.
OTHER PAPERS:
The UK Times reported that The Boeing Company (NYSE: BA) is today expected to announce that its 787 Dreamliner has been delayed by 18 months, a setback which will affect all airlines that have ordered the 787, including British Airways Plc (OTC: BAIRY) and Virgin Atlantic.
After hitting a one-year high of $52.96 in October, the stock hit a one-year low of $33.12 in January. This morning, BAC opened at $39.18. So far today the stock has hit a low of $38.76 and a high of $39.30. As of 12:50, BAC is trading at $38.81, down $0.69 (-1.8%). The chart for BAC looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
Fellow BloggingStocks contributor, Aaron Katsman, and I were discussing the pros and cons of investing in high-yield bonds this morning. You know, those types of risky bonds that pay a pretty good yield in return for investors lending a risky company their hard-earned cash. Inevitably, Washington Mutual's name came up.
Is it worth the risk of default to get some juicy yield?
Dunno, but just as we were discussing the troubled lender, some news rolled out over the wires.
Washington Mutual (NYSE: WM), the largest savings and loan in the U.S., announced it's taking an investment totaling $7 billion from an investor group led by private equity firm, TPG, or Texas Pacific Group.
Well, that helps provide some stability. At least for a while.
MOST NOTEWORTHY: Apple, Novartis and Infineon were today's noteworthy downgrades:
Morgan Keegan downgraded Apple (NASDAQ: AAPL) to Underperform from Market Perform citing increased evidence of broad-based weakness in consumer technology spending in the U.S. and Europe. Additionally, the firm expects challenges in the company's education vertical due to state and local budget issues, which could lead to decelerating growth over the next 2-3 quarters.
Bear Stearns downgraded Novartis(NYSE: NVS) to Peer Perform from Outperform following the acquisition of Alcon (NYSE: ACL), as they find the deal expensive.
Credit Suisse cut Infineon (NYSE: IFX) to Neutral from Outperform to reflect weakness in the U.S. dollar.
OTHER DOWNGRADES:
Goldman downgraded Wells Fargo (NYSE: WFC) and Zions Bancorp (ZION) to Neutral from Buy.
Keefe Bruyette cut Washington Mutual (NYSE: WM) to Underperform from Market Perform.
Baird downgraded Flowserve (NYSE: FLS) to Neutral from Outperform.
General Motors Corporation (NYSE: GM) and Ford Motor Company (NYSE: F) want to export more of their vehicles around the globe, and are getting a lift from new labor contracts and the weak dollar, which they believe will translate to bigger profits, the Wall Street Journal reported.
The Wall Street Journal also reported that former Fed chairman Alan Greenspan has been criticized for how he handled the economy before retiring two years ago, and is under attack for policies that many say started the current financial crisis.
OTHER PAPERS:
According to a person with knowledge of the matter, the Seattle Post-Intelligencer reported that The Boeing Company (NYSE: BA) is likely to announce a new delay of at least six more month for the 787 Dreamliner this week.
Citigroup Inc. (NYSE: C) shares are rising after a few news items regarding the company. First, C named Mark Rufeh as chief administrative officer and head of productivity for the institutional clients group. Rufeh is known as a cost-cutter, and the company hopes he can restore efficiency and discipline. Discover (NYSE: DFS) also agreed to buy Diner's Club from Citi. Lastly, most banks are getting a boost from the news that Washington Mutual (NYSE: WM) may get as much as a $5 billion investment. 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 C.
After hitting a one-year high of $55.55 in May, the stock hit a one-year low of $17.99 in March. C opened this morning at $24.85. So far today the stock has hit a low of $24.61 and a high of $25.19. As of 12:45, C is trading at $25.11, up $1.03 (4.2%). The chart for C looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a June 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 an 8.7% return in just two and a half months as long as C is above $17.50 at June expiration. Citi would have to fall by more than 30% before we would start to lose money.
C hasn't been below $17.50 at all in the past year and has shown support around $21.50 recently. This trade could be risky if the US economy turns out not to have hit bottom yet, but even if that happens, this position could be protected by the support the stock might find around $20, where it found support twice in the past month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in C or DFS. He does control a bullish hedged play on WM that could be doing better.
News that Washington Mutual (NYSE: WM) is close to receiving a $5 billion cash infusion from a U.S. consortium bucks the trend that we have seen of late where U.S. banks take money from foreign sovereign wealth funds. I think that this is a very important step.
First, it shows that American private equity groups believe that U.S. banks are starting to get cheap and they are willing to pull the trigger on some big deals. This should help drive the market forward, as it will be a sign to many that the worst is over.
Additionally, it keeps the financial system in U.S. hands. I posted a while back about the potential security threats posed to the U.S. by foreigners taking control of our financial system. One of the big tools in the war on terror has been using the banks to track all kinds of money transfers. With foreigners taking over sizable chunks of the banking system, this tool will be much harder for the security agencies to use.
Thirty years ago, when Washington Mutual was just a small local bank operating in the state of Washington, its slogan was "a friend of the family." It looks as if it is going back to its roots.
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 4/7/08
TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
Here are some highlights from this past week's 
How in the world did they get into such hot water? I mean, it takes real talent to lose this kind of money. Buying at the highs, over-leveraging and using poor investment disciplines. Why does it all sound so familiar?
When's the worst time to raise money? Well, of course, when you desperately need it.
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Fellow BloggingStocks contributor, Aaron Katsman, and I were discussing the pros and cons of investing in high-yield bonds this morning. You know, those types of risky bonds that pay a pretty good yield in return for investors lending a risky company their hard-earned cash. Inevitably, Washington Mutual's name came up. 
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
Oil hits record $127.43 on supply concerns, raised Goldman forecast
