Reuters:   Pay czar Feinberg approved compensation at several bailed out firms.

Reuters:   Oil moved above $77 as US crude stock dropped.

Reuters:   The US is probing some banks about their sale of risky securities.

Reuters:   Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) CEOs got pay packages approved.

Reuters:   US consumer spending rose by new home sales dropped.

Reuters:   Apple (NASDAQ:AAPL) will host a new product event in January.

Reuters:   AIG (NYSE:AIG) investigated some executives about their pay packages.

WSJ:   AIG’s CEO is fighting a number of pay caps.

WSJ:   Hyundai Motors will emerge as the big winner in US car sales this year.

WSJ:   Ford (NYSE:F) settled the details of its sale of Volvo.

WSJ:   The FTC is looking at how Google (NASDAQ:GOOG) will use technology it will get when it buys AdMob.

WSJ:   RIM (NASDAQ:RIMM) is feeling the strain of outages of its Blackberry network.

WSJ:   Barnes & Noble (NYSE:BKS) Nook e-readers will be delivered by Christmas.

WSJ:   Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) finished repaying TARP funds.

WSJ:   Novartis is making a push into heart transplant drugs.

NYT:   Investigators are looking into whether Goldman Sachs (NYSE:GS) knowingly sold risky securities.

NYT:   Government programs may push up the building of nuclear plants.

NYT:   The recession has cut migration to the Sun Belt.

NYT:   The CEO of Disney (NYSE:DIS) made 28% less than he did last year.

FT:   The Italian tax amnesty raise 80 billion euros.

FT:   Dealmaking income dropped to the lowest level since 2003.

FT:   Investors tend to ignore the picks of securities analysts.

Bloomberg:   Glencore is considering an IPO.

Bloomberg:   A panel looking into the financial crisis will hear testimony from the heads of Goldman Sachs, JP Morgan (NYSE:JPM), and Morgan Stanley (NYSE:MS).

Douglas A. McIntyre

There is a key technical event that may be close to occurring in some of the major banking and financial stocks.  These have all used the 50-day moving average as a key pivot point since at least July, and of late this moving average has acted as resistance as well.  This may be representative of lower volatility, but if you look at the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and the Financial Select Sector SPDR (NYSE: XLF) this was particularly clear as well.  We looked further into key ETF components such as JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corporation (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group, Inc. (NYSE: GS).  Citigroup Inc. (NYSE: C) looked like it had an entirely different chart pattern because it is in a league of its own.

We do not usually conduct technical analysis on the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) because of its daily resets, yet you can see how it has used the 50-day moving average as a key pivot point from October through November and into December.  At $74.06 its 50-day moving average is $76.30 and the 200-day moving average is $59.71.  So shares are within about 3% of that key moving average, and this used to move 3% in one hour when the volatility was strong.   The Financial Select Sector SPDR (NYSE: XLF) used the 50-day moving average as a key pivot point (and resistance) from the end of October, all through November, and into December.  When you consider the recent knocking of the sector by Meredith Whitney, these moving averages as real issues start to come more front and center.

What is interesting in our review is that while the 50-day moving average is within about 3% to 5% of the current price, the chart set-up requires a faster review because this will come up front and center as soon as next week even if the shares suddenly see little price change.  This is because the trend of the 50-day moving average is generally heading lower while the 200-day moving average is heading higher.  We have shown the stockchart.com chart for the FAS to show the stickiness here on these charts of late.

JPMorgan Chase & Co. (NYSE: JPM) is at $41.98; its 50-day moving average is $43.05, and its 200-day moving average is $37.90  Bank of America Corporation (NYSE: BAC) is at $15.34; its 50-day moving average is $15.86, and its 200-day moving average is $13.54.  Wells Fargo & Co. (NYSE: WFC) is at $26.74; its 50-day moving average is $27.83, and its 200-day moving average is $24.27.

Goldman Sachs Group, Inc. (NYSE: GS) is in a slightly different boat at $165.59.  Its 50-day moving average is 172.74, and its 200-day moving average is $152.71.  It was only early November that the 50-day moving average was tested, back when the stock was tying to go from $175 to $180 when financial shares were higher.  Citigroup, Inc. (NYSE: C) is now in an entirely different boat at $3.38 after its record and disappointing share offering last week.  At $3.38 its 200-day moving average is above the price and is listed as $3.69, while the 50-day moving average is $4.11.

To make matters worse, even the 20-day moving averages are all intertwined and in-play as well, and that is in a period where the daily volatility on these major banks and financial institutions is much lower.  Some of these are in a narrowing triangle or flag pattern as well, which is often used as a prelude to increased volatility in the near future.   And this is happening in the silly season when trading volume starts to dry up over the holidays and when market participation is generally light.   Stay tuned.

JON C. OGG
DECEMBER 22, 2009

Meredith Whitney must be staggering her bank coverage news out to get more exposure, or at least that is a cynical take on the matter. Yesterday, she hit Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) on the earnings estimates for 2009 and 2010, with targets out to 2011 and 2012.  Now she has hit JPMorgan Chase & Co. (NYSE: JPM) earnings estimates for this year and next.  While this is under the consensus for this year and next, what we wanted to look at was beyond the call and see what would be fair forward valuations for the greatest money center bank in America based upon her estimates and Wall Street consensus estimates.

Whitney cut the current quarter for Q4-2009 earnings estimates to $0.45 EPS, down from $0.55 and down from a consensus reading of $0.64 from Thomson Reuters.  That in turn has taken down the full year estimates by a similar amount to $1.95 EPS versus a Thomson Reuters consensus of $2.15 EPS.

The good news for JPMorgan is that the earnings estimates for all of fiscal 2010 are now $2.00 EPS rather than $2.05 EPS Whitney had before.  But the consensus estimate from Thomson Reuters for Fiscal-2010 is actually up at $3.22 EPS.  Whitney’s Fiscal-2011 earnings estimate is $2.50, with an estimate of $3.75 EPS in 2012.

Here is the issue at hand when you consider not just what Meredith Whitney is saying, but when you consider consensus estimates.  When you are in late-Q4 2009 or even early Q1-2009, most investors are buying based upon what they expect for 2010 earnings.  With a $40 handle today, this leaves JPMorgan shares trading at 20-times 2010 earnings.  There is almost no doubt that JPMorgan is the safest or highest caliber of the money center or super-regional banks.  But this leaves the stock trading at 20-times forward earnings, which is very high considering ‘the new normal.’

So here is the real question… Can investors in 2010 stomach a two-year outlook to get the earnings multiples back on track?  Jamie Dimon has already hinted about the return to ‘the dividend’ in 2010, although at what rate that payout will be is up for debate.  The dividend before the $0.05 per quarter of 2009 was $0.38 per quarter.  That comes to $1.52 paid out per year, and Meredith Whitney’s $2.50 target for 2011 does not technically give enough of a dividend coverage to make up for the old dividend.  It would effectively have a dividend coverage ratio of 1.5 out in 2012.

If you blended the 2011 to 2012 earnings estimates for a normalized outlook for a two-year time horizon for investors, then JPMorgan on a 2011-12 blended normalized earnings estimate would be $3.125 or thereabouts.  Back in the days of old before valuations started getting sky-high, the banks used to trade at 10-times and 12-times normalized earnings.  Then it was 15-times.  The two answers to all these points boil down to 1) ultimately what earnings multiple YOU are willing to pay for forward earnings estimates, and 2) how far out on the horizon YOU are willing to pay for forward earnings.

It seems that a multiple of 20-times forward earnings is too high, even if this is over a transitional or turnaround period coming out of the abyss.  If you use a 15-times earnings multiple starting early next year with a two-year average blended earnings, then 15-times a $3.125 blended earnings would come to a share value of $46.87.  The issue here now is that many investors in early 2010 will still have a hard enough time just using a 2011 estimate.  If they use the $2.50 estimate there, the a 15-times earnings multiple for the following year would generate a share price of $37.50.

So there is a disconnect in the stock today versus tomorrow.  That is not at all unusual during transition and turnaround periods, and no one can just expect that stocks always adjust to a fair earnings multiple in times of change.  Investors often do not use straight math like this, and admittedly this is the second most simple math test to use other than a trailing P/E ratio.

But there is also another disconnect here.  Unless ‘the new normal’ is going to have investors all in agreement that the proper value for banks is at 20-times a blended forward earnings multiple for two-years out, then either the market is very wrong here with its higher earnings estimates or Meredith Whitney is very wrong here by having her earnings estimates far short of consensus.  The market often gets its long-term bets wrong, and many pundits who make their reputation by being one of the first ultra-bearish pundits often stay bearish for far too long.

And then the flip-side to the argument.  If you decide that 15-times earnings is a fair multiple to pay in early 2010 for all the way out to 2012 full earnings, effective a 3-year forward look, then Whitney’s $3.75 EPS target would generate a forward implied price target of $56.25 out into 2012.   That would imply 40% upside total.  And it needs to be considered again that Whitney is far under the consensus estimates in the near-term.

JPMorgan Chase shares are back in positive territory this morning at $40.040 after trading down close to $40.00 after the research note started circulating trading floors.  Its 52-week trading range is $14.96 to $47.47.  In early 2007 the stock was north of $50.00, and it brushed up right against the $50.00 handle twice in 2008 before the financial meltdown came to pass.

JON C. OGG
DECEMBER 18, 2009

Brand measurement is a popular exercise. Several major business magazines run brand value lists. The annual Brand Z and Interbrand lists always get heavy press coverage. Companies are concerned about their rankings and what they will brag to customers, investors, and consumers about how the world sees their products and services. The Tiger Woods fiasco brought up the issue of how much a brand’s value can be undermined by a rapid and negative change in the fortunes of an important endorser.

Most brand valuation analysis focuses on dollar value, sales and earnings momentum, and how much an individual brand helps a company’s market capitalization. 24/7 Wall St. looked at several major systems to determine brand value and the brand lists based on them. We then looked at the future earnings forecasts for those companies and the recent movement in their stock prices to decide which brands should have the most appreciation in their values in 2010. 24/7 used brand valuations from Brand Z and Interbrand to set 2009 values and then made its own adjustments based on anticipated 2010 improvement. Each brand on the 24/7 list is expected to have an increase in value of least 20% next year.This list is restricted to brands based in the US.
1. Amazon (NYSE:AMZN) has increased its dominance among e-commerce companies, and holiday figures show that traffic to its website is running well ahead of the No.2 shopping destination, Walmart.com. Amazon should sell about two million of its Kindle e-readers this year and there is no competitor that is likely to blunt the increasing sales of the Kindle or the e-books and e-magazines that Amazon sells. Amazon’s share price is up 150% over the last year compared to the NASDAQ, which is up 40%. The stock has continued to outperform the market over the last three months as well. Brand value: $25 billion.
2. BlackBerry, the smart phone made by RIM (NASDAQ:RIMM), maintains its dominance over all of its competitors, and its recent earnings show that its profitability is still increasing and its subscriber base is rising quickly. RIM’s market cap is $40 billion, which as a multiple of sales is extraordinary. The Blackberry may not be competition-proof, but Apple (NASDAQ:AAPL) and the Google (NASDAQ:GOOG) Android do not seem to be taking away its momentum. Brand value: $35 billion.
3. Nike (NYSE:NKE) shows no signs of losing its spot as the world’s premier sportswear company. Its earnings were especially strong in the last quarter. Worldwide future orders are up 4% to $7 billion for the period from December 2009 to April 2010. Brand value: $20 billion.
4. Goldman Sachs’ (NYSE:GS) brand dropped rapidly during the credit crisis and some brand analysis companies pushed down their valuations of the firm by as much as 40%. Last quarter, Goldman posted record earnings and most of its investment banking businesses are doing better than they were before the federal government had to step in and support the financial industry. Congress and some taxpayers are unhappy with Goldman’s compensation practices, but Wall St. has always paid winners well. Brand value: $13 billion.
5. Oracle’s (NASDAQ:ORCL) dominance in the enterprise software industry is growing despite competition from Microsoft (NASDAQ:MSFT), SAP (NYSE:SAP), and Salesforce.com (NYSE:CRM). Oracle’s profits were up 13% in the last quarter even in a market where IT spending is slow. License revenue and support sales are up 14%. Oracle has strengthened its business in the server software industry substantially by buying Sun. Brand value: $26 billion.
6. JPMorgan Chase (NYSE:JPM) is another example of a financial services company that had its brand valuation battered during the credit crisis. It is viewed by investors and customers alike as the most successful money center bank. Its CEO Jamie Dimon is considered the strongest senior manager in the industry. JPMorgan’s stock has outperformed its peers Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC). The company paid back its TARP funds earlier than the other banks. Dimon is conservative in his guidance, but the company results show that future earnings should be impressive.  Brand value: $15 billion.
7. Google share price has risen as it has become clear to investors that the company’s earnings were only slightly dented by the recession and the performance of its core text advertising business is recovering very rapidly, which should improve earnings sharply. Several Wall St. firms have raised their earnings estimates for the company and its stock price has more than doubled from its 52-week low. Google’s move into the mobile operating system business with its Android open-source product is making the company one of the most important providers of software for smartphones and that should extend its search dominance from the PC to the mobile environment. Brand value: $140 billion.
8. Ford (NYSE:F) was pushed off most top 100 brand value lists along with GM as US sales of domestic cars dropped more than a third in 2009 and the market share of American cars kept dropping in their own country. US brands were replaced on brand list by nameplates including Nissan, Porsche, and Honda (NYSE:HMC). Ford is the only American vehicle manufacturer that can claim it has engineered a complete turnaround. It is likely to make money in its home market next year. Its line-up of new fuel-efficient cars has gotten strong reviews from industry experts and is selling well. Ford’s stock is up almost seven times from its 52-week low. Brand value: $28 billion.
9. Avon’s (NYSE:AVP) sales were up for the first through the third quarters of 2009. The same was true with operating income. Avon’s stock price has more than doubled off lows. Despite a poor economy, Avon’s revenue was essentially flat in the last quarter at $2.6 billion. Analysts estimate revenue will rise 10% next year to $11.4 billion. EPS should rise from $1.72 to $2.22. Brand value: $14 billion.
10. McDonald’s (NYSE:MCD) is extending its dominance in the world’s fast food business. Same-store sales have been modestly increasing, but that they have impressively risen every month during the recession. Revenue is Europe and Asia are rising quickly, and the company is making inroads in China. McDonald’s is adding close to 200 stores a year in the world most populous market. The company has been aggressively buying back stock and increasing returns to shareholders. Earnings per share are expected to rise from $3.96 in 2009 to $4.14 next year.  Brand value: $75 billion.

Douglas A. McIntyre

Great. Let’s party like it’s 2007 all over again:

Dec. 15 (Bloomberg) — The three largest U.S. banks are preparing for a comeback in the market for collateralized debt obligations backed by high-yield, high-risk loans, two years after issuance tumbled when credit markets seized up.

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are approaching managers of leveraged loans to offer terms for new collateralized loan obligations following a record rally this year in the debt, according to people familiar with the discussions who declined to be identified because the talks are private. The highest-rated portions of CLOs have climbed to 89 cents on the dollar from a record low of 69 cents in April, according to Morgan Stanley data.

via JPMorgan Poised to Lead CLO Comeback After Record Loan Rally – Bloomberg.com.

This, along with the news the Europeans want to kick-start securitization again shows we have learned nothing, but like Scott Wieland (who I enjoy listening to immensely) trying to kick the heroin habit, it’s just so hard.

How many times are we going to go to rehab to kick our habit of wanting a cheap liquidity fix? The Betty Ford Clinic with its rehab program of deflation, risk aversion, and illiquidity remains open to receive us…

Reuters:   Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) will pay back TARP funds.

Reuters:   Kraft (NYSE:KFT) says it will be disciplined in its Cadbury (NYSE:CBY) buyout effort.

Reuters:   Some of AIG’s (NYSE:AIG) top staff are struggling financially.

Reuters:   Geithner said the US would make a profit on TARP.

Reuters:   Goldman Sachs (NYSE:GS) faces a lawsuit over bonuses.

Reuters:   Citigroup pay and bonus cuts will remain despite TARP repayment.

WSJ:   Exxon Mobil (NYSE:XOM) is making a big bet on natural gas by buying XTO Energy (NYSE:XTO).

WSJ:   Bankers told Obama that they would support some level of regulation.

WSJ:   Dubai’s plan to repay some of its debt may not repair its reputation.

WSJ:   Bank of America (NYSE:BAC) was not able to get the Bank of New York Mellon (NYSE:BK) to take its top job.

WSJ:   GE’s (NYSE:GE) Immelt will draw on the lessons he has learned running the company in an investor presentation.

WSJ:   New mortgage asset guidelines are being proposed.

WSJ:   Wal-Mart (NYSE:WMT) is using its logistics skills to compete with Amazon (NASDAQ:AMZN).

WSJ:   Google (NASDAQ:GOOG) and T-Mobile (NYSE:DT) are discussing a handset marketing partnership.

WSJ:   The EU will probably approve the bid by Oracle (NASDAQ:ORCL) to buy Sun (NYSE:JAVA).

WSJ:   ArcelorMittal will cut thousands of more jobs.

WSJ:   Apple (NASDAQ:AAPL) faces delays in iMac shipments.

WSJ:   Pfizer (NYSE:PFE) salesmen are using new PCs to pitch products and help them comply with regulations.

WSJ:   Toyota’s (NYSE:TM) into hybrids is going global.

NYT:   A new poll shows how badly unemployment has hit many families.

NYT:   GM’s new CEO is trying to change the firm’s bureaucratic culture.

NYT:   Obama pressed big banks to lend more.

NYT:   Abu Dhabi’s loan to Dubai will give it more control over its troubled neighbor.

NYT:   A new study says the impact of electic hybrids could be decades away.

FT:   China moved ahead of the US in the IPO market with $27.2 billion raised.

Bloomberg:   Dubai will need more help to pay bonds due in 2010 and 2011.

Bloomberg:   JP Morgan (NYSE:JPM), Bank of America, and Citigroup are leading a comeback in collateralized debt obligations

Douglas A. McIntyre

The Top Fifty websites based on their percent of US online visits from January to November 2009 are dominated by search and e-mail. The top dozen sites according to data from Hitwise include the Yahoo! (NASDAQ:YHOO) Mail, MSN (NASDAQ:MSFT) Mail, Google’s (NASDAQ:GOOG) and AOL (NYSE:AOL) Mail, in that order. Search destinations Google, Yahoo!, search Yahoo!, and Bing are among the top fourteen sites. Facebook is the No.3 site with 4.26% of US visitors and MySpace is No.5 with 3%. YouTube holds the No.7 spot with 1.42% of US visits.

There are a surprising number of commercial bank destinations among the Top Fifty sites. These include five different URLs that cover three banks–Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and JP Morgan (NYSE:JPM).

There are very few e-commerce site on the list–Ebay (NASDAQ:EBAY) at No.10, Amazon (NASDAQ:AMZN) at No.18, PayPal at No.32, and Wal-Mart (NYSE:WMT) at No. 36. The data shows what an uphill climb the internet is for most large retailers.

Perhaps the most interesting thing about the Top 50 URLs is how little they have changed in the last five years. Except for social networks the names are about the same: AOL, Microsoft, Google, Yahoo!, Ebay, Amazon, Wikipedia, and Craigslist.

This is the complete Hitwise list of the Top 50 Websites from January through November this year based on their share of the US online visits:

Source: Experian Hitwise

Douglas A. McIntyre

From Bloomberg:

Dec. 11 (Bloomberg) — JPMorgan Chase & Co. warrants held by the U.S. government’s bank bailout program sold for $936.1 million, less than some traders predicted.

The Treasury Department’s second auction of warrants held by the Troubled Asset Relief Program drew $10.75 each for 88.4 million of the securities, the agency said today in a statement. Nomura Securities International Inc. trader Bernard Chriqui, who expected them to be sold for at least $12, said he may lower his forecasts for the pending sale of Bank of America Corp. warrants.

“These results could be telling for the upcoming BAC auctions, should they take place,” Chriqui, Nomura’s vice president of equity derivatives trading, wrote in an e-mail.”

There was an $8 floor, so $10.75 is still above the floor. But the sale price for these was less than the ones for Capital One (COF) and the percent premium these warrants are selling for is getting smaller as well. So there’s a risk the market may be getting saturated at this point, and premiums are getting smaller.

But on the other hand, there may be a window in which to get these warrant auctions done in and that shrinking premium could be an indicator of how fast it’s shrinking. It definitely seems like the first ones in & out of this program are getting a distinct advantage over ones who haven’t gone yet and even those who are hoping to get to this point. That doesn’t bode well for the auto companies if the Treasury Department was planning on selling those warrants in a similar way

On Thursday, the Treasury Department will auction off the stock warrants it received from the bank as part of its $25 billion Troubled Asset Relief Program loan.The warrants could be worth as much as $1.5 billion to taxpayers, according to one estimate — though the results of an auction held last week suggest the feds may not get quite that much.JPMorgan JPM, Fortune 500 repaid its TARP loan in June, but the New York-based firm declined to repurchase the warrants, which the government received for free as part of the deal. Warrants give the holder the right to buy stock at a certain price within a certain period.Under the terms of TARP, banks have the right to repurchase the 10-year warrants they gave the government, with the proceeds going to taxpayers as profits. A number of big banks including Goldman Sachs GS, Fortune 500 and Morgan Stanley MS, Fortune 500 made large payments to the government this past summer to buy back their warrants.A bank that declines to repurchase its warrants, for whatever reason, triggers an auction at which the government sells the warrants to private sector bidders.Treasury held its first warrant auction last week, reaping $147 million via the sale of warrants to buy shares in credit card lender Capital One COF, Fortune 500. Thats a nice chunk of change, though it was less than one researcher was expecting.

via Treasury cashing in on JPMorgan stake – Dec. 8, 2009.

We have posted discussions about this in the past, most recently on November 25th and also on October 30th, where we looked at the charts and decided that the S&P 500 was possibly in for some trouble.  On November 25 the broad market index closed at 1111.18, and today it closed at 1091.94, for a loss of 1.7%.  Basically, the market has gone nowhere in that time.

What has happened, however, is that the chart has given us some more signs that the market is running into trouble.  Here is a 1 yr daily chart of the SPX, similar to the one we showed in our previous posts, except with some updated lines.

As you can see, we still remain unable to break above that 1120 line (yellow horizontal line), which is the long term 50% Fibonacci retracement line from the 2007 high to this years low.  It is likely that we are seeing heavy resistance at this level as traders anticipate this weakness and front run it to exit positions for the year.

Additionally, this chart shows that we have broken the uptrend that was established since the March lows.  Keen observers will note that this also happened in October, but the break is much more definitive this time especially when combined with that price ceiling. However, we will need to take a look at where we close on the weekly chart because that should be much more indicative of future movements.

For good measure, the same analysis applied to the E-Mini futures (/ES) yields similar results:

The /ES is attempting, and thus far failing to break through its own ceiling which has been established at 1112.  As you can see, the E-Mini futures just broke below the upward trendline that has defined this rally since March.

The root cause of this is, in our opinion, fund managers selling off risky assets to lock in the substantial gains some of them have been able to accumulate during this tumultuous year.  Obviously, this situation is not sustainable, as mutual fund managers often have a mandated maximum cash balance, and hedge fund managers generally do not like to have their end-of-year statements to clients say that they are in cash.  But there is a lot of money available to be taken off to the sidelines, so this situation may continue through the end of the year.  It will be important to watch leadership stocks over the next couple weeks such as Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Apple (AAPL), Cisco, (CSCO), Google, (GOOG), Ford (F), General Electric (GE), Caterpillar (CAT), etc. and of course gold (GLD) and the US Dollar (UUP). We’ll be making a follow up to this over the weekend.

-Lucid Markets Team

Disclosure: Long GS, CSCO, GOOG, GE, GLD, UUP, JPM and the stock market in general through various other positions.

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Today’s market-moving headlines, macro trade ideas and more…

• An Iranian nuclear bomb, or the bombing of Iran?
• Bull Market Shows Signs of Aging
• Ousted Gundlach Angled for TCW’s Top Job
• Alcoa says weak dollar is bad for US industry
• LaSalle warns of dangers in property market
• Options Signal Stock Peril as Analysts See Profits
• Gold Can’t Beat Checking Accounts 30 Years After Peak
• [Outlook 2010] JPM targets 20% gain for Euro equities
• Bolivia eyes lithium deposits

By Kevin Grewal

Last year the financial sector took a bath as poor lending decisions forced many to shut their doors, leaving only the fittest to survive.  Many thought the worst was over, but there are plenty of signs to indicate that the sector still remains fragile and faces an uphill battle.

Favorable trends in the sector include a report released by Goldman Sachs (GS) indicating that the current credit-loss cycle in the U.S. financial sector is two-thirds of the way done.  From an aggregate perspective, the total losses that have been accounted for in the U.S. credit markets are at $1.6 trillion of the total expected amount of $2.1 trillion to $2.6 trillion.  Additionally, consumer credit appears to be holding up better than expected as credit card early delinquencies are stabilizing and net charge-offs for securitized loans are declining.

On the downside, the sector, in particularly large banks, is being plagued by a slowdown in growth in securities and the scaling back of lending activities, which have been brought on in order to cover lingering credit losses, non-performing assets and net charge offs.  In fact, a research note published by JP Morgan (JPM) stated that large banks are increasing their cash holdings at a rate of 28% quarter-over-quarter.  A likely result of this shift is a dramatic decline in net interest income which will eat away at profits. 

To make things even worse, in 2010, banks are expected to keep a tight grip on cash and lending, especially in construction and industrial loans, is expected to decline and the costs associated with foreclosure related losses is expected to increase. 

Another unfavorable trend in the financial sector is the increased regulation of derivative trading from the Commodities Future Trading Commission (CFTC) and the higher capital requirements being imposed on certain trading assets.  This makes trading of commodities less appealing and will likely eat away at profits. 

Some equities likely to feel the impact of the aforementioned include the following:

• Financial Select Sector SPDR (XLF), which is heavily exposed to large banks, in particularly JP Morgan and Bank of America (BAC).  XLF has more than doubled from its March low of $6.18 to close at $14.66 on Wednesday.
• SPDR KBW Bank ETF (KBE), which is exposed to regional banks. KBE is up 138% from its March low of $9.31 to close at $22.17 on Wednesday.
• iShares Dow Jones US Regional Banks (IAT), which is focused on small and mid-size regional banks like BB&T Corp. (BBT).  IAT is up 88% from a March low of $11.34 to close at $21.28 on Wednesday.

When considering these equities, it is important to keep in mind the inherent risks involved.  To help mitigate these risks, an exit strategy is important.  According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price points: XLF at $14.28; KBE at $21.35; IAT at $19.85.  These price points change on a daily basis and updated data can be found at www.SmartStops.net

From the article:

The U.S. Treasury has finally taken a small step toward trusting markets. It normally cuts deals with banks before investors can make an offer on the taxpayers’ warrants. Taxpayers obtained warrants as part of their banking sector bailout in the Troubled Asset Relief Program (TARP).

Yet, before Thanksgiving it announced that it would be auctioning off the warrants of JP Morgan Chase (JPM), Capital One Financial (COF), and TCF Financial (TCB). According to Dow Jones Newswires, this Thursday, December 3, 2009, it will auction off taxpayers' nearly 12.7 million warrants to buy Capital One Financial (COF) stock.

These warrants that expire on November 14, 2018, give the holder the right to buy a share of Capital One’s stock at a price of $42.13 per share at any time before the expiration date. According to the preliminary prospectus, these warrants will trade on the secondary market under the ticker COF-W.

via First TARP Warrant Auction Set for Tomorrow — Seeking Alpha.

If you want to see an example of how this works, Linus Wilson provides one:

Consider the following example where about 12.7 million warrants are being auctioned. Bidder A bids for 2 million warrants at $25 per warrant; Bidder B bids for 10 million warrants at $24 per warrant; and Bidder C bids for 1 million warrants at $21 per warrant. If all other bids are lower than bidder C, then the price set by auction is $21 per warrant. Bidder A gets 2 million warrants, and Bidder B gets 10 million warrants. Bidder C gets about 0.7 million warrants or about 70 percent of her desired quantity while the higher bidders get all the warrants they wanted.

There’s a reserve of $7.50/share, so hopefully we’ll see some good bidding & price action tomorrow.

We’d like our money back, now. Please.

The program Bank of America (NYSE:BAC) has announced to repay the TARP funds it received is a modest vindication for its retiring CEO Ken Lewis. He has proved that his firm, which has rolled up Merrill Lynch and Countrywide in the last year, has been operated well enough to come up with $45 billion to give back to taxpayers. B of A joins the club  of TARP-free firms that includes Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS),and JP Morgan (NYSE:JPM).

Conspicuously missing from the list of firms that are leaving the program is Citigroup (NYSE:C)

Citi still owes $45 billion in TARP money and it has not made any announcement about its plans to pay the money back. The Treasury is anxious to end the TARP program as a demonstration that the credit crisis has ended. But, the aftertaste of the bailout will not be gone until all the TARP funds are repaid.

The Bank of America announcement puts pressure on Citi to disclose when and how it will repay its obligation. If the firm does not make a announcement before the end of the year, it will send a signal to Wall St. that the bank still has balance sheet problems that are much worse than those of its peers. That will raise the question once again whether the company is viable as a standalone operation or whether it needs to sell of some of its largest divisions. The federal government virtually controls the Citi board, so if the Treasury and Fed become impatient, they could pressure the big bank into a radical restructuring. The idea would not be novel. The Wall Street Journal recently reported that two candidates for the CEO job at Bank of America believed that the firm would be better off  broken into small pieces.

Citi was always the weak sister among the money center banks. A year ago, “Citigroup and the government identified a pool of about $306 billion in troubled assets. Citigroup would absorb the first $29 billion in losses in that portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — would take on any additional losses, though Citigroup could have to share a small portion of additional losses,” the Journal wrote. The size and scope of that program was not matched in any other program the government created during the credit crisis.

Citi may not announce an exit from TARP this year. If it does not, it is still in more trouble than the government will readily admit or than most investors realize.

Douglas A. McIntyre

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Today’s market-moving headlines, macro trade ideas and more…

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• Beijing Gives Nod to Modified Rice

Beijing Gives Nod to Modified Rice

Posted: 02 Dec 2009 12:00 AM PST

China’s government declared two strains of genetically modified rice safe to produce and consume, taking a major step toward endorsing the use of biotechnology in the staple food crop of billions of people in Asia.

ETFDesk users see this as a potential opportunity to: buy Market Vectors–Agribusiness ETF (MOO);

Check out how others are using ETFs to capitalize on this news or add your own opinion

By Dirk Van Dijk
November 27, 2009

Commercial real estate is in big trouble, with rising vacancy rates leading to lower effective rents. On top of that, the Cap rate, which is sort of like the P/E ratio for stocks (or to be more precise, like the E/P or earnings yield for stocks), has been rising, meaning that investors are willing to pay less for each dollar of operating earnings.

Moody’s recently estimated that commercial real estate values are now 43% below peak levels. This has weighed heavily on the real estate-related industries, and the Zacks Industry Ranks reflect those troubles.

Out of 206 industries that we follow, Real Estate Operations now rank 180, with an average Zacks Rank of its constituents of 3.31. The ranks range from 1-5; Zacks #1 Rank stocks indicate a strong buy, which is assigned to the 5% of stocks which are most timely. Stocks which are in the 6th through 20th percentile earn a 2, with similar rules for the 5’s and 4’s.

Almost as badly viewed by the industry rank are the mortgage REITs, which are in 178th place with an average rank of 3.30. Equity REITs fare better, but not by much, sitting in 165th place with an average rank of 3.27. Individual stocks with the dreaded #5 scores in those three related industries include: Capital Trust (CT), Investco Mortgage (IVR), Ramco-Gershensn Properties (RPT) and Glincher Realty (GRT).

Generally, commercial mortgages are for much shorter terms than the 30 years associated with most residential mortgages. Five years is the standard. That means that the owners of the properties are going to have to go to the banks and try to roll over the mortgage. For the banks, this presents a problem, since they do not want to lend out more than the collateral is worth.

Owners of commercial properties are far more likely to ruthlessly default than are homeowners — after all, it’s not like their kids are going to hate them for forcing them to move away from all their friends if they just let the banks take over the property. Most banks, particularly small to mid-sized banks are far more exposed to commercial real estate than they are to residential real estate and mortgages. Even if they make a residential mortgage, they are likely to package it up and sell it off to Fannie (FNM) or Freddie (FRE ) rather than hold it in their portfolio.

As a result, the Zacks Ranks for the regional banks look even worse than the ranks for the real estate companies themselves. The 206 total industries have seven related to the regional banks, with five regional industries plus one for the major regional banks that cover several different regions. With the exception of the major regionals and the banks in the Northeast — both of which are neutral and tied for 104th place with average scores of 3.00 — the banks all look downright ugly.

The worst of the bunch, by a hair, are the Western Regional banks in 198th place with an average score of 3.64, followed by the Midwest in 197th place and a score of 3.51, the Southeast (180th place, 3.31) and the Southwest (177th, 3.29). I don’t think the differences between them are all that significant — just stay away from them all. Some of the larger names among the banks with Zacks Rank #5 scores include: Private Bancorp (PVTB), Sterling Bancshares TX (SBIB) and Peoples Bancorp of Ohio (PEBO). None of them will be mistaken for J.P Morgan (JPM) or Bank of America (BAC).

If you need to have a bank in your portfolio, it would be a good idea to look overseas. In very distinct contrast to their domestic cousins, the Foreign Bank industry is in 15th place, with an average score of 2.27. Some of the banks showing up with coveted 1 scores include major institutions like Credit Suisse (CS) and Deutsche Bank (DB). If you want a more Latin, emerging market flavor for your bank investments, consider Banco Santander (SAN) of Chile or Banco Bradesco (BBD) of Brazil.

Updated throughout the day.

Hershey (NYSE:HSY) and Nestle may enter the bidding for Cadbury (NYSE:CBY) (various)

Microsoft (NASDAQ:MSFT) may pay content companies to block their content from Google (NASDAQ:GOOG) News and use Redmond as their distribution outlet.  (FT)

Colgate (NYSE:CL) may be the next consumer products takeover target. (24/7)

Jamie Dimon, CEO of JPMorgan (NYSE:JPM) may be the next Treasury Secretary (TheStreet)

“Black Friday” retail sales may be misleading if they are strong.  (Reuters)

Barclays (NYSE:BCS) may sell its private equity arm  (ThisIsMoney)

A new version of the Apple (NASDAQ:AAPL) iPod touch set for spring release may include a camera. (Apple Insider)

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Douglas A. McIntyre

The speculation over the fate of Treasury Secretary Tim Geithner and Fed chief Ben Bernanke has grown as Congress has become more troubled by rising federal deficits and unemployment. The $787 billion stimulus package has done too little to create jobs. GDP growth is anemic. Soomebody will  have to take the fall between now and the mid-term elections.

The theory is that the President will fire Geithner and pull he support for reappointing Bernanke to show that he is concerned with the problem and is willing to bring in new blood.

The latest in speculation is the Geithner will be gone soon and  JPMorgan Chase & Co. (NYSE:JPM) CEO Jamie Dimon will become the next Secretary of the Treasury.

The New York Post reports that ”a number of policy makers have begun mentioning Dimon as a successor to Geithner.” While other large money center banks struggled to stay in business during the credit crisis, JPMorgan did relatively well. JPM has also apparently been reasonable about the pay packages it has given to its management and top financiers, unlike Goldman Sachs (NYSE:GS), which will distribute record bonuses this year.

Dimon is not likely to want the job. If he leaves the banking business for a few years, there is no guarantee that he can get another position running one of the country’s top half a dozen financial firms. And, there is always the chance that if the economy continues to stagnate, he will be indentifed with the problem and his reputation will be tarnished.

Douglas A McIntyre

Reuters:   The dollar may keep rising as investors close out bets on oil and the currency.

Reuters:   Black Friday deals may not signal a retail comeback.

Reuters:   Kraft (NYSE:KFT) is weighing a higher Cadbury bid as competition from Hershey (NYSE:HSY) and Nestle may emerge.

Reuters:   A group of economists raised their estimates for US growth next year.

Reuters:   Microsoft (NASDAQ:MSFT) and News Corp (NASDAQ:NWS) are working on a distribution deal that would take News Corp’s news sites off Google (NASDAQ:GOOG).

Reuters:   A Fed official said the mortgage-related asset purchase program should be extended.

Reuters:   Chieftain Capital may break into two firms.

Reuters:   JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) may outsource some back office operations to India which would bring hundreds of millions of dollars in sales to Wipro (NYSE:WIT), Infsys (NASDAQ:INFY) and Tata Consultancy. More US financial firms may move operations as they pay TARP funds.

Reuters:   Japan is leaning toward buying F-35 fighters from Lockheed Martin (NYSE:LMT).

WSJ:   Investors are backing away from risk as the year ends.

WSJ:   Italy’s Eni will buy oil stake in Uganda.

WSJ:   Reliance Industries made a $12 billion bid to take control of LyondellBasell

WSJ:   Nissan may produce its electric cars in China.

WSJ:   eBay’s (NASDAQ:EBAY) search feature was down on Saturday.

WSJ:   Existing home sales are up but that has not helped the US housing market much.

WSJ:   Banks are playing a dangerous game by using short term debt to fund loans.

WSJ:   Chrysler is offering 10% financing and $5,000 cash back on 2010 models.

WSJ:   Government payments on debt are based on interest rates that are likely to rise and by 2019 debt service could be $700 billion a year.

FT:   Microsoft and News Corp are talking about a web deal to counter Google News.

FT:   Coca-Cola (NYSE:KO) will work to triple sales in China within a decade.

Bloomberg:   The dollar may not bottom until next year.

Douglas A. McIntyre

Earlier this evening I ran across this post over at Seeking Alpha titled “Signs of Life for TARP Banks: Treasury to Auction off Stock Warrants.”  Apparently, JP Morgan Chase, Capital One, TCF Financial warrants are going to be auctioned off:

The three banks, whose warrants will be sold via auctions over the next month, are JPMorgan Chase (JPM), Capital One Financial (COF) and TCF Financial Corporation (TCB). These three banks, that received a total of $28.9 billion from the TARP, have fully repurchased Treasury’s preferred stock investment. The current move to sell their warrants will completely free these banks from government intervention.

Here’s how the Treasury explains this:

The US Department of the Treasury today announced its intention to dispose of several warrant positions received in consideration for investments made under the Capital Purchase Program (CPP).  Over the next month, Treasury intends to conduct auctions to sell its warrant positions in JP Morgan Chase & Co., Capital One Financial Corporation, and TCF Financial Corporation.

Each of these banks has fully repurchased Treasury’s preferred stock investment.  The warrant sales anticipated over the next month, if consummated in full, would represent Treasury’s disposition of its remaining holdings in these companies.  The proceeds of these sales will provide an additional return to the American taxpayer from Treasury’s investments in these banks beyond the dividend payments it received on the related preferred stock.

So this is essentially the last hurdle these banks need to clear to be free from TARP.  It looks like the auction will be open to a variety of participants, including the banks themselves.  More from the Treasury press release:

Treasury intends to sell the warrants through registered public offerings.  These offerings will be executed using a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments above a minimum price specified for each auction.

So it sounds like there’s a price floor on the warrants that the Treasury will accept and the bidders have to bid up from there.  Sounds reasonable.  The question is what will the floor be and what’s the premium paid over that floor.  Bigger premiums translate into a bigger return for taxpayers.

And given the CIT bankruptcy and several recent bank failures of TARP recipients, we need these to go well.  A failed auction would not be a good sign.

Reuters:   The Senate is near its first vote on healthcare.

Reuters:   Dell (NASDAQ:DELL) is betting on corporate spending for its recovery.

Reuters:   Time Warner’s (NYSE:TWX) AOL showed that the worst is not over for media job cuts.

Reuters:   China cyber-spying against the US will probably grow.

Reuters:   Oprah will end her talk show in September 2011.

WSJ:   Large shareholders are asking Goldman Sachs (NYSE:GS) to cut bonuses.

Reuters:   GE (NYSE:GE) and Vivendi are $1 billion apart on the value of NBCU.

Reuters:   Ferrero may want the Cadbury gum and candy unit.

Reuters:   The bank bill is delayed in the House and the Senate is divided over the legislation.

Reuters:   The Fed sees little risk in inflation in a weak economy.

Reuters:   Chrysler may close another 100 dealerships.

Reuters:   PricewaterhouseCoopers says corporate accounting fraud is rising around the world.

WSJ:   Gap’s (NYSE:GPS) profits rose 25%.

WSJ:   Microsoft (NASDAQ:MSFT) says Windows 7 is selling well.

WSJ:   VW’s board approved its merger with Porsche.

WSJ:   The chairman of GM is pushing for higher quality cars.

WSJ:   Google (NASDAQ:GOOG) announced plans for its Chrome operating system.

WSJ:   The Administration’s estimate of stimulus job gains is being attacked.

WSJ:   GE (NYSE:GE) is focusing on industrial and infrastructure businesses.

WSJ:   Retailers are cutting prices on the Palm (NASDAQ:PALM) Pixi.

WSJ:   China Mobile (NASDAQ:CHL) is counting on 3G for growth.

WSJ:   Sony (NASDAQ:SNE) will focus more on moving its businesses online.

WSJ:   More homeowners are falling behind in mortgage payments.

WSJ:   Private equity firm Carlyle will put money into three Chinese high growth firms.

WSJ:   The EU is speeding up an antitrust investigation into the McGraw-Hill (NYSE:MHP) S&P group.

WSJ:   Harbinger cut its stock holdings in The New York Times (NYSE:NYT).

WSJ:   A joint venture between BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP) makes a merger more likely.

WSJ:   Dell (NASDAQ:DELL) is falling behind rivals in sales.

WSJ:   Sears (NASDAQ:SHLD) cut its losses with cost controls.

NYT:   An FHA effort to prop up mortgages is putting taxpayers at risk.

NYT:   Private equity firms are trying to raise money in China.

NYT:   Geithner hope to end the TARP program.

NYT:   The Treasury will auction off some of the warrants it received as part of the bank bailout

NYT:   The OECD was cautious on its forecast for the global economy.

NYT:   France may issue $52 billion in bonds.

NYT:   JPMorgan (NYSE:JPM) will buy the part of its British banking partner that it does not own.

FT:   US short-term interest rates are turning negative as banks move toward safer investments.

FT:   Many retailers are pushing smartphone products for the holidays.

FT:   The difference in the value that GE and Vivendi put on NBCU could kill a merger with Comcast (NASDAQ:CMCSA).

Bloomberg:   Morgan Stanley (NYSE:MS) says China stocks could rise 30% on liquidity and valuations.

You can join our open email distribution list to hear more news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, key analyst calls, and more.

Douglas A. McIntyre

by Jennifer Schonberger, for The Motley Fool, November 18, 2009.

One year after the government bailed out Wall Street, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) are awarding record billions in bonuses. Clearly, compensation practices are just as out of line now as they were before the financial crisis. But compensation is just one part of the larger issue of corporate governance weighing on companies across America.

According to Nell Minow, editor and co-founder of The Corporate Library, a research firm that focuses on corporate governance, agency costs and conflicts of interest are the inherent problems in corporate governance today.

“If you’re going to have a large, complex organization, and you’re going to take capital from people who are not going to be in the boardroom all the time, what can we do to ensure those directors are as vitally concerned with the long-term success of the organization? That’s what corporate governance is all about,” Minow said on a recent visit to Motley Fool headquarters…(continue reading)

The most charitable thing that can be said about Vikram Pandit, the CEO of Citigroup (NYSE:C) since December 11. 2007, is that he was in the wrong place at the wrong time. The bank’s stock is down 90% since his first day as chief executive. The shares of other large international banks were battered by the credit crisis, but JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) have gained most of their value back during the two-year period. Bank of America (NYSE:BAC), the most hapless of all the large financial firms, has even performed better than Citi in the market.

The time bombs of mortgage-backed securities were already sitting on the Citi balance sheet when Pandit was given his job. He can claim to be blameless for the cause of most of the firm’s severe problems and in that he would be right. What history will remember Pandit for, as much as his bad luck for being at Citi as the markets fell apart is how little he did to improve the bank’s fortunes. Most of Citi’s restructuring was forced on the company by the government. The firm has done some modest joint venture work in its private client and wealth management business by selling some of these parts of Citi to Morgan Stanley (NYSE:MS). Citi plans a public offering of it Primerica division.

But, the firm remains a nearly unmanageable monolith with 350,000 employees and 200 million customers. Many of its businesses bear no relationship to one another. Citi is no better off than it was the day Sandy Weill created it. The economy is just worse now.

Pandit did have a chance to completely alter Citi and perhaps in the process do something extraordinary for the company’s shareholders. Citi’s Institutional Clients Group is an investment bank tucked inside its parent. It should be valued more on the basis that Goldman Sachs (NYSE:GS) or Morgan Stanley are. That will not happen until it is an independent business.

Citi owns Banamex, the largest bank in Mexico. It is nearly impossible to make a case that a large financial firm in a developing country which has only modest economic prospects is valuable long-term investment.

Citi’s credit card business would probably be worth more to investors as a separate business. Capital One (NYSE:COF), which is in the same sector of the financial industry, has done much better in the market than Citi has during the two years since Pandit took over.
It is not always true, but in general more nimble companies can navigate a disaster better than firms which are highly complex collections of assets. That may be the lesson of GE’s (NYSE:GE) performance during the recession. The same may hold true for Microsoft (NASDAQ:MSFT) which has at least five major businesses, some of them with almost no relationship to the company’s massive operating system and business software operations.

The Personnel and Compensation Committee of the Board of Directors of Citigroup Inc. had a meeting last week. They determined that Vikram Pandit will be paid a base salary of $1 next year and will get no “stock salary” for the period. He may have suggested the compensation as a gesture to Citi’s battered shareholders. It is not much of a token. Those shareholders would rather have Pandit take home $50 million and see Citi’s stock back where it was on December 11, 2007

Douglas A. McIntyre