William Blair raised Quest Diagnostics (NYSE: DGX) to Outperform from Market Perform. The firm believes that the long-term fundamentals of the clinical laboratories sectors are still strong.
UBS upgraded Massey Energy (NYSE: MEE) to Buy from Neutral on valuation.
ArthroCare (NASDAQ: ARTC) was upgraded to Buy from Hold by Lazard, since the firm expects a small restatement while they believe a large restatement is priced into the shares.
Arch Coal (NYSE: ACI) was upgraded to Buy from Neutral by UBS.
Aetna (NYSE: AET) was initiated with a Buy by Banc of America, which believes the company will experience industry-leading member growth.
Banc of America initiated Wellpoint (NYSE: WLP) with a Buy rating, as the firm expects the shares to rebound from near trough valuations.
Wachovia (NYSE: WB) was reinitiated by Friedman Billings with an Underperform rating, as the firm expects the company to incur higher credit losses than the Street expects due to its outsized exposure to residential real estate.
Six Flags (NYSE: SIX) was started with an Above Average rating by Caris.
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.
Several independent economists have said they expect a big U.S. bank to fail. It may be easy to ignore them because they are not affiliated with any of the large institutions that monitor financial companies. But now the former chief economist of the IMF says one of America's big banks will probably not make it.
According to Reuters, "The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said." Rogoff is currently an economist at Harvard.
The analysis pointing to the bank failure is based on the facts that the credit markets and housing situation will get much worse. Current earnings from banks and brokerage houses indicate that the prediction may well be true.
TheStreet.com's Jim Cramer says lower gas prices mean the numbers are too low.
People are missing this retail move. They are missing it because the market is deciding right now that the guidance companies are giving is just plain wrong given the $3.50 at the pump (although premium's a lot more expensive). They are also recognizing that the strong are surviving and thriving and taking share in a radical fashion -- witness Lowe's (NYSE: LOW) (Cramer's Take), which must be killing Sears (NASDAQ: SHLD) (Cramer's Take) and the mom-and-pop shops out there.
When I met with Lowe's last year, they told me that they have picked up share in every downturn. They did not know when the downturn would end or when you would see the results, but they were confident that the longer the downturn lasted, the more likely they would be to have pulled away from their competition.
In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.
The industry unleashed a massive PR campaign. It convinced you that it saw the error of its ways. They had "reformed." You could trust them again with your hard earned assets.
And you did. Money flowed back in the coffers of these firms and others.
Each time Wachovia (NYSE: WB) management says things are getting better, news leaks out that they are getting worse. It has become tiresome and dangerous to the health of the bank's investors.
Now the firm's money management unit, Evergreen Investments, may have to be sold. According toReuters, it could be worth $5 billion. At some point, Wachovia will run out of stuff to sell. With mortgage default rates accelerating, that could happen sooner rather than later.
What this says is that Wachovia may be beginning to understand that its worst problems are not behind it. If so, the bank stock's recent rise is a sucker rally and investors are about to get beaten like red-headed mules. A month ago, Wachovia's shares were just above $9. Now they change hands at almost $16. It would be hard to find a growth stock that has done as well over that period.
Housing is still troubled. Foreclosures are still rising. Wachovia at $16 won't last.
CNNMoney notes that Morgan Stanley said it would offer to repurchase all ARS "held by individuals, charities and small and medium-sized business with accounts of $10 million or less at the bank." Morgan Stanley will begin to start buying back $4.5 billion worth of ARS on September 30th and will "make its best effort to provide liquidity solutions" for institutional investors by the end of 2009. But New York attorney general Andrew Cuomo is not satisfied with Morgan Stanley's proposal.
Meanwhile, the list of big ARS issuers that have not settled grows shorter. Here are six holdouts (with their 2007 municipal ARS issuance in parentheses):
TheStreet.com's Jim Cramer says all that money has to go somewhere, and this is a likely destination.
Clash of the ideals! Oil's down, and what can you buy when there's so much bad bank news? What can you buy when Wachovia (NYSE: WB) (Cramer's Take) is boosting reserves and Morgan Stanley (NYSE: MS)) (Cramer's Take) is still being pursued by authorities and JPMorgan (NYSE: JPM) (Cramer's Take) says July stunk and UBS (NYSE: UBS) (Cramer's Take) is so tarnished that you can't believe it was once the most conservative blue chip out there.
The answer is tech, of course!
Wait a second. Would anyone mind if we actually had a reason to buy tech beyond the Kindle, the device that made Citigroup gaga about Amazon (NASDAQ: AMZN) (Cramer's Take) -- not that you needed a device to do that.
Sure, we have pre-seasonality. Remember, you are supposed to buy tech at the end of the summer, not that anyone waits that long.
U.S. stock futures were mixed Tuesday morning following more negative news out of the financial sector: J.P. Morgan announced a $1.5 billion write-down, UBS a loss, while Wachovia and Morgan Stanley are dealing with auction rate securities. However, oil futures declined further to near $113 a barrel, offsetting financial sector woes and pushing stock futures higher. Russia halted its attacks on Georgia, signaling a cease-fire could come near. [Update 9:09: Seems lower oil wasn't enough to offset financials' concerns and futures now indicate stocks could start flat to lower.] JPMorgan Chase (NYSE: JPM) said in a filing with the Securities and Exchange Commission that it suffered more substantial third-quarter losses related to the hard-hit mortgage sector than it did in the second quarter and had to take a $1.5 billion write-off on mortgage-backed securities and loans.
Morgan Stanley (NYSE: MS) said late Monday that it will offer to buy back up to $4.5 billion of auction-rate securities from retail clients, following similar announcements from rivals. The broker also said it will make whole any losses suffered by retail clients who bought auction-rate securities through the firm and try to provide liquidity solutions for institutional investors.
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.
After nearly six months of stalemate, things are finally starting to happen for holders of Auction Rate Securities (ARS) -- the $330 billion of long-term debt whose yield used to reset in weekly auctions. This morning, The Boston Globe reports that UBS AG (NYSE: UBS) is poised to announce that it will redeem $19.4 billion worth of ARS and pay $150 million in fines, split between Massachusetts and New York. UBS follows Citigroup, Inc. (NYSE: C) and Merrill Lynch & Co., Inc. (NYSE: MER), which yesterday announced plans to redeem over $17 billion worth of ARS.
Why should you care? If you have money frozen in these securities, the reason is obvious. If not, what's happening here suggests three lessons for investors:
Don't buy without knowing. Before you buy anything a broker is trying to sell you, read the prospectus, find out how the broker will be compensated for the sale, and if you don't understand what you're buying, don't buy it. Many people bought based on broker pitches that ARSs were cash equivalents, highly liquid, and yielded slightly more than money market funds. It turns out that ARS auctions started failing publicly last September.
If your money becomes illiquid, make alot of noise. ARS investors contacted government officials and the media in an organized way. The public attention led to investigations by legal officials. That attention uncovered UBS e-mails demonstrating that brokerage firms decided to dump the toxic waste from their own books to the accounts of their individual customers -- even as their executives dumped the securities from their own portfolios.
Oh, happy day. Mortgages issued in the first half of 2007 are going bad at a rate much faster than those issued in 2006. According toThe Wall Street Journal, data from the "Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months."
The news means that earnings could get worse at large banks that have mortgage loans at the center of their businesses. Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) come to mind. That should be especially interesting for investors in the two companies. Over the last month, both stocks have recovered. Washington Mutual is up about 2% and Wachovia has risen a remarkable 30%.
Wall Street had hoped that bank stocks, especially those with businesses focused on the mortgage markets, would improve as subprime loans worked their way through the system. That may have worked if prime mortgages weren't going bad at an increasing rate these days and loans from 2007 didn't appear to present more risk than those from earlier periods.
All of that is to say that a stock like Wachovia, which fell as low as $7.80 and then recovered to $18.41, is not out of the woods. As a matter of fact, it may be heading back in.
Wachovia Corp. (NYSE: WB) shares are down some 7.5% (which is at least better than today's earlier decline of about 10%), after a Morgan Keegan analyst recommended selling the shares. The call follows Wachovia's 30.9% jump last week and comes ahead of a meeting between new chief executive Robert Steel and investors.
The analyst, Robert Patten, who rates Wachovia at Underperform, made the profit-taking call this morning. In his opinion nothing has fundamentally changed to warrant last week's price appreciation. He attributes the gains to short-covering. Wachovia is still facing more credit losses as its option adjustable-rate mortgages (option-ARMs) and commercial real estate (CRE) loans are likely to continue defaulting at an increasing rate.
The analyst also noted that he has already seen this pattern of shares running ahead of fundamentals due to CEO changes. And as long as Wachovia needs to restructure its balance sheet, the stock price hike was premature.
Makes sense to me. With investors' approval of Steel, has Wachovia's balance sheet magically improved? And what can he do to improve it so soon after taking the top job? And even though he said he wouldn't, could that include raising more capital by issuing more common shares (diluting shareholders)?
Anyone who actually had the nerves of steel it takes to play financials this past year may want to pay attention to Patten's call. Recall that Wall Street's leading financial analyst, Meredith Whitney, also downgraded WB to Underperform in July. If you choose to go against her, good luck to you!
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.
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Analyst upgrades:
Michael Vodicka, 
Several independent economists have said they expect a big U.S. bank to fail. It may be easy to ignore them because they are not affiliated with any of the large institutions that monitor financial companies. But now the former chief economist of the IMF says one of America's big banks will probably not make it.
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In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.
U.S. stock futures were mixed Tuesday morning following more negative news out of the financial sector: J.P. Morgan announced a $1.5 billion write-down, UBS a loss, while Wachovia and Morgan Stanley are dealing with auction rate securities. However, oil futures declined further to near $113 a barrel, offsetting financial sector woes and pushing stock futures higher. Russia halted its attacks on Georgia, signaling a cease-fire could come near.
Yesterday the 
After nearly six months of stalemate, things are finally starting to happen for holders of Auction Rate Securities (ARS) -- the $330 billion of long-term debt whose yield used to reset in weekly auctions. This morning, 
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