Financials and Retail: Not as Dire as They Seem

Well this is now officially bad!

I think I may be the last guy left looking for a bottom here as most analysts are looking for retests of the 1/22 lows and most traders are looking for the exits. As David Fry points out in this S&P chart, investors were just slammed all day long with a "get me out" finish that literally had people screaming.

Yesterday I really felt like the guy in Animal House who stood in front of the crowd saying: "remain calm, all is well" as the crowd ran him over. Much like Supreme Court Justice Potter Stewart’s comment about pornography, I shall not today attempt further to define the kinds of shenanigans I understand to be occurring in the manipulation of the stock market; and perhaps I could never succeed in intelligibly doing so, but I know it when I see it, and I sure saw a lot of it yesterday.

I said to members yesterday afternoon that I couldn’t articulate a bullish position based on these truly AWFUL charts but I also couldn’t find anything I wanted to go short on. If there is nothing to go short on and I don’t want to go to cash, then I guess I’m a bull!

Trader Mike paints a dire picture of the financials with this chart:

This does indeed look terrible as does pretty much every other chart out there but let’s think, just for a second about the undelying premise here. BAC, for example, wrote down $3Bn last quarter - BUT, they earned $14.9Bn in 2007, INCLUDING THE WRITE DOWN! In all of 2003 they made $9Bn and for 2000-2003 BAC made $34.1Bn while in 2004-7 they made $66.5B.

This is not even comparing apples to oranges, this is comparing apples to bananas!

If you want to sell me BAC for the same price it was trading for in 2003 because it had $3Bn, $6Bn, $12Bn in losses based on an event they have hopefully learned a lesson from - FINE, sign me up!

The same goes for C ($60.6Bn vs. $66.6Bn as a 4 year total AFTER $16Bn in write-downs), GS ($11.4Bn vs. $30Bn) or pretty much any of the other financial institutions that are under fire. We don’t buy companies based on recent losses, we are supposed to examine companies based on future earnings and the future earnings of almost any of the XLF components is UP from here.

On Page A3 of the very, very negative Wall Street Journal yesterday was an article that mentioned that retail sales, the very sales that started this panic in January, were higher in February than estimated. What’s not mentioned, but is clearly evidenced on this chart, is that big box retailers WMT, COST and TGT had an average gain of 9% in total sales from last year. Now that may seem to be offset by department stores, who lost an average of 3.5% but NOT when you consider that WMT, COST and TGT had over $39Bn in combined sales while the other department stores had less than $4Bn total. Click to enlarge:

The 9% sales gains of the big 3 retailers were greater than the TOTAL sales of the other department stores. That offsets inflation by a wide margin. So people may be downshifting their buying habits but they are buying more for less.

I’m not saying this is a market cure-all, I’m just saying this is a story that is being missed with all this doom and gloom forecasting and I’m saying that things just may not be as dire as they seem.

Comments

[clear1]

Great article. Isn't it a little late to be selling these names? I think if you pick up your head, look down the road a few years then "hold your nose" and buy these great franchises...you will look very smart. I have been adding to shares of BAC, WFC, USB and LM. Do the math on these valuations!

[Philip Davis]

Not sure you read that right, we're buying the financials! Picked up WM July $12.50s today because they were so cheap and C as well.

[TenGWL]

Good points... these default write downs have been and maybe will be taken for a bit longer. However the profitability mentioned above added to a hugely steep yield curve for months to come will be a catalyst moving into Q2/Q3... XLF Jan 2010 25 Calls at 4.20 and go to away for a year.

[drmalaka]

This might not be the best way to read corporate financials Philip. You might want to check EPS and PEs instead. B of A is a much bigger bank since 2003 so we would expect them to be making more money just because of the aquisitions. But there are more shares outstanding now, so you must compare those relative numbers not absolute values.

As for your calls, the least you could have done is picked some of the better financials. WM is as bad as they get. July 12.5 cheap? I have a feeling WM did not make a loan unless the borrower promised to default. Single digits very soon for this one. And C is no better. They raised cash ten points ago at an 11plus percent interest and now they need more money. I am not sure if the conversion price for the note includes a ratchet down protection like the one MER has, if C has this too then raising money through equity is even costlier.

[HedgeTruth]

philip...perhaps you might be interested to know 2 things that have already occured with regard to any investment in WM...

first Fitch just downgraded the debt ratings on WM as well as WFC and a few others...

and James Cramer has an article up since the close saying WM is going to ZERO...he lists 10 banks that are likely to fail...WM, WFC, NCC and others...

you are crazy to touch any financial...

the mortgage situation is so much worse than you understand...

it was reported today that of all the 2006 sub prime originations that Countrywide did in 2006, 18% NEVER EVEN MADE the first payment...

almost 20% never made 1 payment...

defaults on sub prime will reach 30% by the end of the year...

you perma-bulls are crazy to be looking for value in the financials...

[HedgeTruth]

drmalaka, you are quite astute and even made me chuckle...

i agree about WM loan quality...horrible...

all these amateurs just think because these stocks are down but not yet ZERO that they must be bargains...

BAC and C are in trouble as well...especially if BAC actually completes the Countrywide deal...

LEH and Bear Stearns are also probably going to bankruptcy heaven...

have you checked CDS prices on BSC lately...oh lordy...

[nitroae23]

What he doesn't get is earnings projections are from the goldilocks days,M&A,gone,cred... card earnings,after defaults,much lower,only thing keeping market above water is godforsaken belief that earnings are turning around Q3 or Q4,that light at the end of the tunnel? It's a freakin bus!

[nitroae23]

Retail also had the advantage of an extra day in Feb and an early easter.Pickles,my lovely wife,is my retail barometer,people are buying,then returning ALOT of things,rose colored glasses may not be the fashion this spring!

[stockmarketadvantage]

Until housing prices level off and begin creaping up the financials will continue their death spiral. The problem is, we are only about halfway into the decline. Houses could drop another 15-20% in value!

[daffy]

Don't agree with retail at all. I have a lot of discretionary income and I have to say, it is going into the market right now, not to BBY, or JWN, or a new car, et cterea. The spending of my discretionary income has gone almost to zero. If that is the case with someone who has discretionary income, what say about those who don't?

Financials? whoa . . . I made a few bucks on the cfc-bac deal. Might make a few more if CFC gets down to four and BAC stays put. Doubt it though, it will have to look pretty darned good. Although, a 3/4 point reduction might just get one a good short term gain on the deal. Timing there. Now might be the time to get into that one, or next week. Other than that, well, I am staying away from financials. Too risky. The only financial I am playing with right now is ETFC (and some might say I am crazy for doing that).

The hypothesis about 02-03 prices is interesting. If you take the 80 month EMA, and find that the stock price is under that AND is under the 2002 share price, you might have a stock that is worth investigating (in financials and retail). BAC falls short by about 5$ on the share price. I would say that is too risky right now. If the price went to $29, yeah, I would buy. This summer isn't going to be very nice to financial stocks, but there will be a few winners, and they will bethe agressive ones.

Opinions and conjecture.

embarassing disclosure: 1% of my portfolio is CFC @ $16.80. OUCH.

[Vegasjoe]

This credit binge and deleveraging just goes to show that CEOs and other senior management at these institutions are grossly overpaid, never had an original idea, and rationalize the meltdown of their own stock as "everyone else was doing it, therefore, it must have been ok!" But then, when fired, the gutless Board's give them hundreds of millions for long and loyal service! Go figure! Who doI send my resume to at C, MER, WM, etc.....Commerical real estate is next! Goodbye regional bank CEOs.

[User 108022]

WMT, COST and TGT had an average gain of 9% in total sales from last year

Make a reasonable net of food price inflation at WMT and Cost ( which they don't release) and the 9% gain is negligible.

[waseem]

Very good article to soothe fear with logic

[gebby]

talking about buying stocks. but why not just buy growth. not fslr but almost any other solar is attractive. of course the street is staring at charts and picking targets lower. but the fundamentals will have these stocks recovering nicely in the next 12-18 months(give yourself some time for stupid to be finished) csiq, solf, stp, asti, etc.

[daffy]

I love it:

"give yourself some time for stupid to be finished"

[cheesecake]

yes, i agree with waseem, a good analysis of the financial stocks. Personally, i think C, washmutual and BSC are dogs. I like MER (mostly because of the CEO) and BAC, although the CFC deal was shear madness on their part. CFC is a complete dog.
i might enter MER next week.

[fjd10595]

These companies are not bargains, they will go lower- a lot lower. Real estate has a long way to go on the downside.

[NewstraderFX]

A Double Stochastic Overbought was indicated on Feb 27 and this market still has a ways to fall.

[blah-blah]

Lots of fear in the comments - music to the ears

[bruin532]

As it becomes evident that comodities and inflation are spiraling higher and the stock market is spiraling lower the Administaion will step in with a bailout inititive plan. It will take months to develope and it will eventually be short of the mark but it will get Bush close to the door. Financials will again be in play the market wil find equilibrium and panic will subside. What date do you pick I take 4/1/2008. This is no county for old maids

[johnthebear]

It would nice if Goldy was alive and well, but she is dead. The banks have no money to finance buyers of all those foreclosed homes. Remember, it takes new loans to enable buyers to those homes. Without new buyers, the housing market cannot recover.

The US treasury simply does not have the money sitting around to finance a home for everyone who wants one. Those who lost their homes are now homeless, looking for an apartment to rent.

Also, the same real estate bubble we have had also exist in England, Ireland, Span, China and many other countries around the world. Lets face it the writedowns mean the money is lost.... gone, never to return. And the 7 trillion already lost in the stock markets all over the world will not recover enough to repay those who lost their wealth. So, were does the worlds wealth end up? The oil exporting countries. They have the wealth, not us. They are buying into our financials for a reason.

Next, elect Obama be president and you can start praying with the koran, just like the one he used when he was sworn in to the Senate. Tough to be a prophet.

[bruin532]

Three groups eventually and always end up with power/wealth through llow cost consolidation. Energy-defense-banks. The fed always takes care of there own. Hedge funds like Blackstone are already buying and divying up the spoils (see what they report this monday that will be an indicator of the financials. Banks will merge and the cycle will be repeated. Financils will recover and lead the market in the second half of the year.

[bruin532]

Hedge truth WFC is not listed in the group and no way Wachovia is going broke. Read Bill Gross at Pimco and the need for fed action

[valuking]

John the Bear, you are a liar and a slave, nothing more.

[hopeandfear]

I simply can't get past the fact that this is a recession like no other. Where are the plant closings? Where is the 7-10% unemployment?

This is a one-industry recession driven by the monumental credit bubble.

How do you have a recsssion when the world's largest retailer and the largest employer in the US has a sales increase of 9% in THE MIDDLE OF WINTER! And they did it with a headwind of lower prices!

Maybe WMT margins won't be great, but Mr. And Mrs. America are going about their lives, paying their bills, and buying stuff without their HELOCs and refi's just fine thank you.

Why did XOM start falling about two months ago? Why have most of the retailers been holding or rising since January?

Where are the massive Wall Street layoffs and bonus cuts? Where is the real estate crash in Greenwich,and Darien, and Nantucket?

I am glad I don't own a condo in Vegas or Riverside, CA or C or WM, but, when the oil and copper and other commodity speculation bubbles bursts as well, those holding the true value plays find all right with the world again , maybe by Summer.

Yes we may see a major bank failure or two or five but we've been there before with Conentinental Ill and New England Merchants and we survived and prospered.

Yes we're going to go back to some "see throughs" like we had in the 80s' this time it may be whole residential neigborhoods, not office towers.

Yes I will have to accept the fact that my paper gains on my nice suburban home are not what they once were but I like the house and I will pay the mortgage and go on with my life like about 97% of the US.

[abcv]

And that ladies, is why this one really is NO DIFFERENT than the other panics we've had in the last 300 years.

98% of us are doing our thing. The people who are going to get hurt the most are the ones would levereged themselves and those that followed the levereged..right off the cliff.

[johnthebear]

Valuking, so where am I wrong? I am not a slave to the media and the administration that wants to put lipstick on a pig. It is the truth that hurts so bad.

Sorry about that, but facts speak for them selves, regardless of political spin.

[Philip Davis]

Wow, what a great discussion on this post!

So yes, that's a very good point about looking at the dillutive number of shares relative to earnings after the acquisitions, I will do that next time I revisit the banks.

I don't think WM is particualraly good but I do think that, like Chrysler and GM, they simply won't be allowed to fail. Also, even if the banks do repossess 20% of all the homes they lent money on and even if they only get 60% of the value they wrote a mortgage for, it will still be more money than what they've written off already. $400Bn in write downs is $200,0000 on 2M homes worth of value written off, that's some pretty steep discounts!

So yes, I think it's bad but, as hopeandfear says, not THAT bad. Who are losing their jobs? Construction workers and finanical workers - isn't that to be expected in a housing slump? I must say today's actions make things seem very dire, it's like people just can't get out of the markets fast enough...

[valuking]

John the bear

My comments had nothing to do with your economic analysis. Let me spell it out for you:

--You are a liar for asserting that Sen. Obama, a Christian, was sworn in with the Koran.

--You are a slave to your own bigoted worldview.

But when all is said and done, you're just another jackass spreading garbage around the internet.

I'm surprised Seeking Alpha allows comments like yours at all, and I'm surprised Phil Davis apparently condones them.

So who's up for some BAC JAN 2010 30 calls?

[win]

Thank you, valuking. I just read these comments, and I'm glad you piped in. I was hoping someone would spot the hypocrisy in these Obama haters - first shouting Muslim! Muslim! at him, and now yelling on about his church. It's not about Obama. It's about hatred, and justification for hatred.