Monday started poorly and ended worse for Markets as the weekend turmoil of Lehman Brothers (LEH) and AIG (AIG) weighed heavily on the financial sector and stocks as a whole. As hope for a bailout of Lehman, or at least heavy asset sales dwindled Sunday, leading suitors heading for the exits, the company had no choice but to file for the bankruptcy protection.
Still standing, but sharing the negative spotlight is AIG, the insurance giant, which said that it may need $40Billion to keep moving forward. A remarkable number, when considering the company is reportedly backing nearly $60Billion ($57.8Billion according to Bloomberg) in sub-prime mortgages. AIG is looking to raise about $20Billion in capital and sell off another $20Billion in assets. New York has allowed the company special permission to access $20Billion in an effort to shore up some liquidty. The mathematics are still working heavily against AIG as shares plunged 60%, cutting half of AIG's market cap. Still not as bad as Lehman though, which lost 95% of its value due to its bankruptcy plans.
As Bank Of America (BAC) and Barclays (BCS) walked away from Lehman bailout talks on the weekend, BAC was busy getting another deal done as it agreed to purchase Merrill Lynch (MER) for about $50Billion, valuing the firm at $29/share. While Merrill jumped at the open the market's selling sentiment dragged it down to $17 from a high of $22.
And the rest of the financial doghouse followed:
Citigroup (C): down 13%
Bank Of America: down 21%
Wachovia (WB): down 25%
Washington Mutual (WM): down 26%
JP Morgan Chase (JPM): down 10%
Goldman Sachs (GS): down 12%
Morgan Stanley (MS): down 13%
The markets have seen down days like this before, albeit not to this extent, and many traders start talking themselves into the so-called bargains, but as former Fed chariman Alan Greenspan put it, and I paraphrase, 'This is the worst economic situation I've ever seen'.
Even the strongest of financials can still go lower from here, but for the ones who can ride it out, show they can stay afloat and show they can stay profitable, bargain basement prices wont be around for that long. That's a big reason why the Street will be looking so closely at Morgan and Goldman earnings.
Disclosure: Author owns C, GS
15 September, 2008
Finance Fails Again! Dow Drops 500 points
31 December, 2007
2007 Ends with a Bearish Tone, Dow loses 100 points
The Dow ends the year down 101 points, and while the average is in positive return territory for the year (about 6.5%) the latter part of the year has become increasing volatile and negative. The credit crisis dominated the market headlines over the last few months and Big Finance has endured billions upon billions of losses in their asset valuations.
These bad bets have cost the big banks plenty as the hit list is broad and plentiful. Since Mid Year highs, there have been nothing but bad news from the Financial sector. (Apart from consistent blowout quarters at Goldman Sachs (GS))
- Citigroup (C) is down 48%
- Bank Of America (BAC) down 24%
- Wachovia (WB) down 34%
- Merrill Lynch (MER) down 46%
- JPMorgan Chase (JPM) down 19%
- Morgan Stanley (MS) down 31%
- Lehman Brothers (LEH) down 24%
- Bear Stearns (BSC) down 38%
- Goldman Sachs down 14%
There will be opportunities in 2008 for the Investor, as I feel the recession fears are overblown and selling based on those fears is overdone. The selling was done consistently throughout the past couple months, timed with the Federal Reserve Interest rate moves.
2007 will go down as the year of the iPhone from Apple (AAPL), and the popular mobile phone gadget has helped the technology company to another breakout year by more that doubling since the device's unveiling. Look for Apple to extend its reach with iPhone in the coming months (Europe, Asia etc.). Technology and Oil were the leaders for better parts of the year in 2007 and this will likely continue going into 2008. I believe there is tremendous commodity and trader pressure to get and keep oil above the $100 mark. Should this happen it will continue to put pressure on the consumer and big ticket spending (Homes, Cars) will soften still, putting further pressure on the overall market and North American economy.
Luckily though, all metrics the market has gotten lately have pointed to a stable and growing US economy, and consumers seem to be taking high gas prices in stride. All signs point to a strong Christmas season, led broadly by Technology (Gaming & gadgets), and with this the chip makers should see continued strong demand, specifically Intel (INTC).
It's the first end of year trading session for the WC Power Tech Fund Blog and I'd like to thank all the readers throughout the first few months here.
24 October, 2007
Market Musings Oct 24, S&P Changes add NYX, and Facebook news
The Markets came back strong to the close on Wednesday after being down fairly significantly mid-day. News of the struggling Housing sector and brokerage house Merrill Lynch (MER) writing down over $8Billion due to the Credit Crunch rattled investors and traders. A not so earth shattering outlook from high flier Amazon (AMZN) didn't help Technology stocks either.
The economic news on Existing Home Sales hurt stocks at the start as sales fell 8% year over year, which was worse than most economists had expected. Lots of talk about this "not yet being the bottom" led to further fears and thus more selling. Stocks seemed to bottom out however mid-day and recovered to be only flat or slightly lower. Technology was hurt by Amazon's perception of next quarter margins, which had investors heading for the profit taking fence.
NYSE Euronext (NYX) was up again today, hitting a recent high of $92, before settling at $90/share at the close, on news that it is about to be inserted into the S&P 500 and S&P 100 indices. This news was confirmed earlier in the week but today marked the last trading day before the company was to be officially recognized. Shares of NYX have rallied almost 9% since the announcement. The sheer number of money managers and funds that now have to own the company will likely continue to drive the shares higher going into its earnings report in early November. The stock is still off of its $112/share 52-week high but with a strong report and continued buying demand it may be sooner rather than later that the stock breaks into that territory.
Facebook, everybody's new favourite uber-growth social network, made more headlines today with a couple major announcements by big technology companies. Research In Motion (RIMM) announced a new application for its popular BlackBerry devices that ties in with Facebook, further promoting Rim's plans to nip at the heels of the consumer market segment. Microsoft (MSFT) threw its name into the social network hat as it agreed to purchase a 1.6% stake in Facebook for $240Million. The transaction gives Microsoft better leverage against its main Internet advertising competitors; Google (GOOG) and Yahoo (YHOO), and values Facebook at a lofty $15Billion.
Disclosure: Author is long NYX, GOOG
28 August, 2007
Consumer Confidence Slips, Market Tumbles from Uncertainty
A second straight day of falling economic metrics gives way to a second straight day of losses for the markets. Fresh off the heels of Monday's Housing report, in which housing sales fell to a 5 year low, came this morning's Consumer Confidence metrics. The Consumer Confidence Index fell from previous month high levels of 111 to around 105 and further economic fears clouded American Markets.
Federal Reserve minutes came out also and pulled markets down further as talk centralized on the possibility of the housing slump being more prolonged than initially thought. Investors took this sentiment from the Fed as a sign to head for the door leaving the Majors (Dow, Nasdaq and S&P) down across the board about 2%.
Will this mean that the Fed will need to provide the market with the needed September interest rate cut? Investors seem to be hoping that the rate cut will come and the markets will more than likely continue in this drifting pattern till the interest rate policy is known. The Financials led the sell off today as earnings estimates are being trimmed left and right for the Investment Banks and Major Financials. Goldman Sachs (GS), Morgan Stanley (MS), Bear Stearns (BSC) and Merrill Lynch (MER) all were sold off substantially today with Lehman Brothers (LEH) being the biggest victim of the selling. Citigroup (C), Bank of America (BAC) and Wachovia (WB) were also sold heavily showing that the dip in the financial sector was widespread.
The selling was broad across North American markets with all sectors seeing red. The Fed revealed that it had hoped the market would, in essence, fix itself but that clearly has not been the case. Now although the American economy is still in good shape, to create market stability here the Fed has really no choice but to interject again and produce an Interest Rate cut soon.
23 July, 2007
GS or MS: Battle Of The Banks
In the truest sense of the old-school type Battle of the Bands, where local Garage hopefuls filled stages to compete for the attention of, and possible employment from a single club or record label owner, I present a Battle of the Investment Banks.
With Bear Sterns (BSC) being the latest to fall like a 100 year old Redwood doing battle with the sub-prime market. Reports have surfaced over the last week that a couple big hedge funds inside the firm that were heavily invested in this industry are now virtually worthless. Does the investment banking investor have any hope out there?
Well, there are choices aplenty in this space such as Goldman Sachs (GS), Morgan Stanley (MS), Lehman Brothers (LEH) or Merrill Lynch (MER), along with several smaller firms all fighting for business and your investment dollar. Not to mention that the big brick-and-mortar banks are expanding heavily into the investment sector.
Taking the stage here and now surely wont be a local teenager with a new birthday present electric guitar, as we're looking at and comparing the cream of the crop in the investment banking world. Goldman Sachs and Morgan Stanley are the two biggest firms by market cap and for good reason, both companies are very good at what they do, and that's attract big clients, charge huge fees, and make money off every kind of investment imaginable. Have you ever heard of Weather Derivatives? It's where people in the marketplace can place bets on how many days it'll be higher or lower than the average temperature in a given month. You've never invested in something like this? Didn't think so, but guess what, these firms do!
So which one is better now and years from now? First to the stage Goldman Sachs. (Come on, you're telling me that wouldn't make a great band name)
The stock has fallen from a peak of $234 to $205 as it's been sideswiped, like everything else in the sector by this risky-mortgage mess. More often than not it is credited as being the best investment bank in the world and it sits with a trailing P/E of 9.5! A single digit P/E for a company that's earning and growing like Goldman Sachs. This rock star sports a healthy estimated Price to growth ratio of 0.7.
Goldman is so good at what it does but seemingly analysts are confounded at exactly what it does and how it goes about doing it. Yes Goldman has booked tremendous gains over the last year in some early Chinese investments but it's investing in these kinds of things all the time and people are surprised by the success. The nature of some of Goldman's trading operations make it seem like that part of the business is being run like one large hedge that can crash and burn on a bad bet or two but I think professionals that cover this company are missing the point. These are the smartest market people on the planet and they have backup plans that have backup plans. There's risk taking and then there's too much of a good thing, that's bound to crumble, just ask those Bear Sterns funds.
Goldman appears to be masterful at managing its internal risks but they have yet to fully be rewarded for it. The run up of the stock from the 150s to the 220s last year and early into this year should've only been the beginning however a wall was hit and the shares are tumbling back to the 200s. Opportunity? I think so!
Let's look at the other company. Morgan Stanley. If you thought Goldman's fundamentals were impressive how about Morgan sporting a P/E of 7.7 and a Price to growth of 0.6. Now Morgan Stanley notoriously went through step after step of cost-cutting and re-tinkering over the last 12 months in order to boost it's shareholder value and it seemed to have spark a turnaround in the business as well. But it also was hit hard falling from a high of 76 to it's current levels around $67/share. As far as businesses go, Morgan Stanley would seem more transparent to the average investor as they have clearly drawn lines for its business units and even are a player in the credit card world with their Discover brand. However, that has been an area of contention for the company as many feel selling that business unit would ultimately lead to more value long term and as such the company announced June 30th as the day it would in fact spin off the Discover business resulting in a $14/share payout to shareholders.
Is there an opportunity here also? Yes, however here is why I believe Goldman Sachs is the better play now and for the longer term.
Both companies brought in revenues of around $39Billion over the last year, however Goldman earned a Billion more ($10B v $9B). Goldman clearly is able to more efficiently turn a profit at a slightly higher margin rate. Here's the kicker though, Morgan Stanley employs 55,000 people, while only 30,000 work for Goldman Sachs.
Not only is Goldman earning more from the same amount of revenue, they are doing it almost half the personnel! So is it likely that in the years going forward Morgan Stanley is going to go through a massive layoff spree to bring it's personnel down so it can compete with Goldman in terms of profitability? No. What does seem more likely though, is that as both firms grow Goldman should have more room to expand and hence earn more money running it's top notch trading operations and hence have more opportunities to lure business away from other firms.
Both firms look prime for a rebound later in the year however I think you'll find Goldman's songs at the top of charts more consistently than Morgan's.
Disclosure: Author is long GS and holds no position in MS
16 July, 2007
Money Holders: The Bank Story
All this excitement over the sustained tech rally combined with the lingering negative sentiment from the sub-prime mortgage meltdown has given the Bankers a bad rap.
Year to date the major bank stocks in America are either flat or down, all this while the market rallies longer and later in the year than usual.
And banks are typically very solid dividend plays, so what gives with the lack of respect?
It's clear that once this sub-prime fiasco is put to bed the industry can lift itself from the under performing rug and enjoy the spoils that investors have bestowed on seemingly the rest of the market. Earnings announcements are coming this week from JP Morgan Chase (JPM), Merrill Lynch (MER), Banc Of America (BAC) 4.5% yield, Citigroup (C) 4.1% yield, and Wachovia (WB) 4.3% yield
The chance to get in on these major banks is now as the forward P/E's of BAC, C and WB are below or right at the magic 10 multiple.
On the Canadian side of the market, the banks have performed very well over the last 6-8 months, however these gains are being put under pressure due to raised interest rates on inflation fears, the continuing strength of the Canadian Dollar, and simple valuations. However as these Canadian banks have come off their highs, buying opportunities are available.
CIBC (CM) hit a 52-week high of $107, while now sitting at $98
Royal Bank (RY) hit a 52-week high of $61, now sits at under $58
Similar patterns can be seen for Bank Of Montreal (BMO), TD Bank (TD) and Bank of Nova Scotia (BNS), although the latter 2 have not fallen off their highs as much as their peers.
This industry is lying in the weeds and it seems ready to join the party in the coming months. And while the waiting game is on, it's always a good thing to cash in on those +4% yields.
Disclosure: Author is long BAC, C, WB, RY
14 July, 2007
Earnings Week: July 16-20
Earnings season has gotten underway in full swing in the American markets.
Weekly earnings that are of note:
July 17th
Intel (INTC) : Expected $0.19/share
Merrill Lynch (MER): Expected $2.02/share
Coca-Cola (KO): Expected $0.82/share
Yahoo (YHOO): Expected $0.11/share
July 18th
Altria (MO): Expected $1.13/share
eBay (EBAY): Expected $0.32/share
JP Morgan Chase (JPM): Expected $1.08/share
Pfizer (PFE): Expected $0.50/share
July 19th
Banc Of America (BAC): Expected $1.20/share
Broadcom (BRCM): Expected $0.27/share
Google (GOOG): Expected $ 3.59/share
Microsoft (MSFT): Expected $0.31/share
July 20th
Citigroup (C): Expected $1.13/share
Wachovia (WB): Expected $1.22/share
complete earnings schedule available at Yahoo Finance
http://biz.yahoo.com/research/earncal/20070716.html
It'll be a big week for financials and banking as investors will get to see how munch of an effect the sub-prime meltdown spillover has continued to have. Also a big week for technology, specifically in the Internet space as Google will once again be in a position to overshadow Yahoo and Microsoft in the search earnings space.
