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  • Market Wrap-up: market shrugs off weak economic data ahead of Intel’s and JP Morgan’s earnings

    The market ended up marginally higher, shrugging off weak retail sales and initial claims data after the proposed Obama tax on banks was interpreted by investors as not particularly onerous.  Retail sales in December were surprisingly down 0.3% while economists expected them to be up 0.4%, but at least they were up 5.4% from the year-ago period and November results were revised upward.  Initial jobless claims for last week were 444K, not alarmingly higher than the 437K consensus estimate.

    The focus today was on Obama's proposed tax levy on banks, which if too onerous could derail job growth and economic stability.  In the end, the perception was that the tax costs -- while high -- would be passed on to customers in one form or another eventually.  Besides, a lot of uncertainty around the plan and its implementation still remains for it to have much of an impact in the midst of a bull market for Financials, especially in front of JP Morgan's - JPM earnings announcement coming tomorrow morning.  The expectation is that JP Morgan will kick off the earnings season officially on good terms, yet the market's reaction is less dependable, since there may be some selling the news action regardless.  After the market's close, Intel - INTC kicked off the Tech earnings season with a very robust beat.  It earned 40 cents per share vs. analysts' consensus estimate of 30 cents, driven by a healthy top line and margins.

    The financial tax proposed by Obama will cost the top 50 or so financial institutions -- regardless of whether they received or repaid or produced gains on TARP for the government or not -- 5-10% of their earnings for the next 10 years approximately.  This is a big knock on their earnings power.  The banks that are most impacted are those with the highest leverage and dependence on wholesale funding.  The formula for calculating the tax levy is to charge 0.15% on covered liabilities, which are total liabilities excluding deposits (in order to avoid double-taxing, since the FDIC levies insurance fees on deposits). 

    Critics said that it is not a good idea to tax companies to make them pay, because they eventually figure out a way to pass on the costs to their customers.  Therefore, the taxpayers will end up paying anyway, but on top of that there will be curtailed lending and growth in the short-term, which can threaten a job market recovery.  The government countered that the tax will be levied only on the largest institutions, so their smaller competitors will maintain prices, so large banks will be unable to pass on the costs to consumer in order to remain competitive.  This argument applies to most of the large banks, but perhaps less so to JP Morgan, Goldman Sachs, and Morgan Stanley, who have larger investment banking and trading operations, where the smaller banks are not competitors.  At the same time, the larger banks with investment banking franchises are the ones that have the most leverage and dependence on wholesale funding, so the impact on their return on equity (ROE) is larger than for the rest of the group.  However, the negative impact may be misleading, since they are also the most capable of passing on costs to their customers.  Regardless, regional bank stocks, e.g., SunTrust - STI and KeyCorp - KEY (both up more than 4%), outperformed in reaction to the government making larger banks pay for TARP-related losses.

    A big gainer today was LaBranche - LAB, which was up 40% after announcing what seems to be at least a partial liquidation plan.  It will sell its market making business to Barclays for net proceeds of $25mm and will increase its stock repurchase plan from $24mm to $100mm (the market capitalization before the announcement of the news yesterday evening was only $160mm), as the sale of the market maker business freed up some of its capital.  With a tangible book value in excess of $5 and what could be a liquidation plan in place, the company has figured out a way to unlock value for shareholders.

    Disclosure: No positions
    Tags: JPM, INTC, LAB
    Jan 14 6:27 PM | Link | Comment!
  • Market Wrap-up: surprising stock market reversal after early morning slump
     The stock market started off at a lethargic pace reminiscent of yesterday’s poor action, but suddenly woke up around 10:30AM, from which point the S&P gained 11 pts and ended up 83 bps for the day compared to 50 bps for the Dow and 112 bps for the Nadsaq, which strengthened in front of Intel’s – INTC earnings release on Thursday.  Investors had been taking some profits in tech stocks following some early warning signs, but in the end investors expect very strong results from Intel.  One of the biggest gainers was actually a tech stock, Baidu – BIDU was up 13%, on news that its biggest threat, Google – GOOG, was thinking of graciously exiting China.  Google cited a sophisticated hacker attack, but the cynical view is that the company found an excuse to bow out of a country that has been the cause of a lot of troubles.

    The driver behind the market turnabout was the Financials sector, which caught investors by surprise.  Apparently, the Financial Crisis Inquiry Commission panel, where top chief executives – Blankfein of Goldman Sachs – GS, John Mack of Morgan Stanley – MS, Jamie Dimon of JP Morgan – JPM, and Brian Moynihan of Bank of America – BAC – were questioned about their role in fueling the financial crisis turned out to be pretty benign.  Its conclusion might have been the trigger for the market rally.  The health-care sector was also a market leader after Credit Suisse upgraded Merck to outperform from neutral.  Energy stocks were the overall laggards after a report showed a larger-than-expected increase in US crude oil inventories.

    Another reason for banks’ outperformance included the rejection of AMCORE Financial’s – AMFI ($45bn asset bank with exposure to the Chicago market) capital restoration plan by the OCC, which sent the stock down 19% but was also interpreted as a unique opportunity for many of the regional players who want to build out their exposure in that market, e.g., Fifth Third – FITB, which was up 5%.  The opportunity would come about if the FDIC decided to shut down AMCORE and give it to one of the regionals via an FDIC-assisted deal.  These deals have been very accretive in the past and explains the strange market reaction to the first couple of banks’ poor earnings reports and capital raises, which have been met with very strong price action. 

    Associated Bancorp – ASBC raised 25% of its market cap on Monday and the stock is almost back to pre-news levels, and First Midwest – FMBI announced a similar capital raise today following a disappointing earnings miss by a wide margin, yet its stock actually closed up 5%!  The latter reaction was interpreted as short-covering and investor confidence that First Midwest’s strong management could execute on an FDIC-assisted deal-centric strategy.  It showed investors that it is not safe to shot regional banks with large commercial real estate exposures and problems as institutional investors seem still underweight the sector and can be particularly hungry for capital raises that give them an opportunity for alpha-generation.

    Marc Faber offered his thoughts on Bloomberg following a panel of experts that he attended yesterday.  Experts think the markets will rise between March and June and then correct to flat by year end.  According to Faber, this type of complacency may lead to a more meaningful correction in the near term, but is likely to reverse by year-end.  Everyone seems to think that the market is fine and the momentum is on the upside.  From his point of view, he sees Amazon – AMZN, Google – GOOG, and Goldman Sachs – GS not doing well, so he has evidence of weakness emerging.  Also, after the huge gains last year, it's tough to have a repeat this year.  The risk-reward in the S&P is not particularly good right now.  Faber thus advocates taking a break from the markets in order to preserve capital. 

    Faber expressed concern about the value of the US dollar because the Fed cannot stop buying securities; otherwise, the market will decline and interest rates will go up.  On the “so what” question around excessive liquidity and a weak currency, Faber answered that the strongest manufacturers and exporters in history have had strong currencies.  In other words, money printing does not create wealth.  The US government is mistaken in thinking that it can fix things with permanently low interest rates.  The US' share of global GDP is and will continue to go down if things don't change.  (video link here:

    Disclosure: No positions
    Jan 13 10:43 PM | Link | Comment!
  • Market Wrap-up: turning ugly for the first time this year
     Things turned ugly (on a relative basis… nothing compared to last year’s corrections) in the market for the first time since the beginning of the new year, after Alcoa’s earnings miss (AA was down 11% for the day in reaction to the poor results overnight and following analyst downgrades) and profit warnings or poor results during the day put investors on the defensive.  The recent run-up in stock prices anticipated a strong quarter, but early reports reveal a still-weak economy.  On top of poor earnings reports, news that China was moving towards tightening monetary policy much sooner than expected further supported concerns weak employment and consumer credit reports last Friday.  In an effort to control inflationary pressures and signs of bubbles, the Chinese are requiring that banks hold more cash reserves against deposits, which means that the multiplier effect of the financial system – and thus system liquidity – is going to decline.  The tightening will likely impact commodities and exporters the most.

    Investors may also start taking a more defensive position in their portfolios (read: selling and shorting) in advance of the slew of earnings by financial companies over the next couple of weeks.  According to recent memory, banks have been running up into earning and then investors have “sold the news”, even if it was positive.  Stock price action has some elements of déjà vu.  In addition, the government is overlaying headline risk on top of what is feared to be another “kitchen sink” quarter. 

    Banks will take a thorough look at their books and try to bring forward charges so as to have an easier 2010, since investors are looking forward and may forgive a peak-loss quarter (as long as things are improving hereon forward).  Especially for banks that are expected to lose money, they have an incentive to take even more charges and take advantage of look-back tax benefit provisions before they expire.  At the same time, the FDIC considers making banks pay more fees if they tie compensation to risky practices, while the White House is working on taxing banks in order to recoup TARP-related losses. 

    The losses from the $700bn Troubled Asset Relief Program (TARP) were pegged at around $140bn in early December, but earlier this week the Treasury revised estimates to $69bn, including $30bn for AIG, $30bn for the automakers, and $27bn for the Home Affordable Modification Program (OTCPK:HAMP).  Banks are directly responsible perhaps for the HAMP program losses, but offsetting those are the $19bn of profits to the Treasury from bank capital injections and investment programs.  So, the net loss due to banks may be only $8bn, yet news reporters say banks may be on the hook for up to $100bn to help balance the government budget.  It may not make sense, but stranger things have happened and, if we have learned anything in the past, there is little point in speculating what the government will end up doing, not implying that its actions may not make sense but rather that the forces that it has to balance are so intertwined and the situation so complex that unexpected actions come about.

    As expected, following the trigger-miss by Alcoa and Chinese monetary tightening that impacted commodities (the CRB commodities index was down 1.7%), the Materials sector was the worst-performing for the day, down 2.6% compared to a decline of 34 bps on the Dow, 94 bps on the S&P, and 130 bps on the Nasdaq, which is continuing an under-performance streak so far this year).  Financial stocks also had a very rough day due to headline risk and “sell the news” concerns around the earnings season.  Tech stocks have had a nice run-up, so investors are locking profits in anticipation of “sell the news” action and to protect against outlook warnings in advance of Intel’s – INTC earnings release coming up on Thursday.  Semiconductor companies like Micron Technology – MU and SanDisk – SNDK were down 5-6%.

    Disclosure: No positions
    Tags: AA, INTC, MU, SNDK, economy
    Jan 13 12:28 AM | Link | Comment!
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