Q3 2009 Earnings Call

October 22, 2009 08:00 AM ET

• U.S. AAA rating not guaranteed. The U.S. could lose its AAA rating if it fails to reduce its deficit over the next 3-4 years, Moody's says. Steven Hess, Moody's lead analyst for the U.S., acknowledges reducing the gap won't be easy: "Raising taxes is never popular and difficult politically, so we have to see if the government can do that or cut expenditures." Earlier this year, markets were spooked after S&P cut its outlook on Britain to Negative from Stable. Meanwhile, Moody's said today European countries' rising debt won't trigger across-the-board downgrades.
• Deep pay cuts coming to TARP recipients. In a plan to be made public within the next few days, the government will order deep pay cuts at the biggest bailout recipients - Citigroup (C), Bank of America (BAC), AIG (AIG), GM, Chrysler, GMAC and Chrysler Financial. The plan targets the 25 top earners at each company, who will see their compensation decline this year by about 50%, while bonus payments will be slashed by up to 90%, to be replaced by stock that they'll be restricted from immediately selling. The plan does not address firms that didn't receive bailout funds, or that have already repaid their loans.
• South Korea's $3.9B oil buy. State-owned Korea National Oil Corp. agreed to buy Canada's Harvest Energy (HTE) for $3.9B - $1.7B for its outstanding shares and the assumption of $2.2B in debt. Shareholders will receive $9.52/share - a 37% premium to Wednesday's close. The deal is South Korea's biggest outbound cross-border deal ever in the Oil & Gas sector, and ranks seventh in global Oil & Gas sector M&A transactions in 2009. Harvest produced 53K b/d in Q2, 70% of which was crude oil and 30% was natural gas. Shares +29.1% premarket to $9.05.
• Bove drops a bomb. Rochdale Securities analyst Richard Bove sent stocks into a tailspin late Wednesday after he downgraded shares of Wells Fargo (WFC) to Sell, despite a consensus-beating Q3. Bove is concerned by the positive impact mortgage hedges have had on Wells' recent results, which "keep coming through for the company whenever it needs to bolster earnings," but are a nightmare for investors who shouldn't look at such activity as generating predictable or repeatable profits. Bove also called the portfolio Wells acquired from Wachovia 'cancerous.' WFC -5.1% yesterday.
• eBay falters on gloomy outlook. eBay (EBAY) posted Q3 earnings that exceeded expectations, but shares traded lower after-hours after its guidance gave a gloomier vision of the near future than many expected (read eBay's Q3 earnings call transcript). eBay has struggled as online shopping habits have shifted away from auctions to fixed-price purchases on sites such as Amazon.com (AMZN).
• Beige Book sees signs of growth. The Fed said most regional economies are on the mend, as home sales rebound and manufacturers restart idled operations. "Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered," the Fed said in its beige book tally. The report also highlighted how heavily businesses are relying on government spending: "There were several reports that the only 'sure' business will come from government stimulus projects, although funding for such projects has been slow to materialize," it said.
• Microsoft's big day. Microsoft's much-anticipated OS upgrade, Windows 7, goes on sale today. The company hopes Windows 7 will gain more traction among retail and corporate clients than its most predecessor, Vista, which was seen as slow and clunky. Analysts say the new OS isn't likely to cause a sudden spike in PC sales, a point conceded by Microsoft CEO Steve Ballmer, who said recently IT budgets "aren't going to rise just because we shipped a new version."
• Twin deals for Twitter. Twitter inked deals to sell the rights to mine its pipeline of 'tweets' with both Google (GOOG) and Microsoft (MSFT) Wednesday, underscoring the growing importance of real time search. Neither would say how much it's paying for the rights to index the millions of daily tweets, considered to be Twitter's most valuable asset. The deals could be the first meaningful revenue for Twitter since its 2006 inception, and begin to answer the much-explored question of "where's the beef?"
• A strong Q3 for China. China's Q3 GDP came in at 8.9%, just below the 9% economists forecast. Separate reports showed industrial production and retail sales also accelerated. China's return to robust growth continues to raise the question of when policy makers will withdraw record fiscal and monetary stimulus in order to avoid another bubble.
• Galleon wind down begins. Managers of Galleon Group's $500M Asia fund are considering buying the unit, sources say. On Wednesday, Galleon told employees and investors it would wind down the firm after its founder was charged with insider trading. Unless the government intervenes, investors likely won't get their money back until Jan. 1, 2010.

Earnings: Thur. Before Open

• 3M Company (MMM): Q3 EPS of $1.37 beats by $0.20. Revenue of $6.19B (-5.6%) vs. $5.77B. Shares +1.2% premarket. (PR)
• AT&T (T): Q3 EPS of $0.54 beats by $0.04. Revenue of $30.9B (-1.3%) in-line. Wireless subscribers +2M to 81.6M. Shares +2% premarket. (PR)
• AU Optronics (AUO): Q3 EPS of $0.26 beats by $0.01. Revenue of $3.5B (+8.4%) vs. $3.21B. Operating margin 6.8%. Shares -2.3% in Taiwan. (PR)
• Black & Decker (BDK): Q3 EPS of $0.91 beats by $0.09. Revenue of $1.21B (-23%) in-line. Sees Q4 EPS of $0.68-0.78 vs. $0.50 consensus. Shares +2.2% premarket. (PR)
• Bristol-Myers (BMY): Q3 EPS of $0.52 beats by $0.01. Revenue of $5.49B (+4.4%) in-line. (PR)
• Bunge (BG): Q3 EPS of $1.62 beats by $0.15. Revenue of $11.3B (-23.6%) vs. $12B. Sees full-year EPS of $3.10-$3.50 vs. consensus of $4.69. Says fertilizer business continues to be pressured by high-cost inventory and a weak pricing environment. (PR)
• Celgene (CELG): Q3 EPS of $0.56 beats by $0.02. Revenue of $692M (+16.8%) vs. $671M. Shares +5.4% premarket. (PR)
• Check Point Software (CHKP): Q3 EPS of $0.52 beats by $0.03. Revenue of $234M (+17%) vs. $231M. (PR)
• CONSOL Energy (CNX): Q3 EPS of $0.48 misses by $0.18. Revenue of $1.09B (-6.7%) in-line. Shares -3.1% premarket. (PR)
• Cooper Industries (CBE): Q3 EPS of $0.70 beats by $0.06. Revenue of $1.29B (-25.6%) in-line. "Revenue and orders for maintenance and repair items and product lines that declined rapidly at the beginning of the economic downturn are beginning to improve, while the longer cycle products appear to have now bottomed." Shares -0.3% premarket. (PR)
• Danaher (DHR): Q3 EPS of $0.89 beats by $0.03. Revenue of $2.75B (-14.2%) in-line. (PR)
• Delta Air Lines (DAL): Q3 EPS of $0.06 beats by $0.11. Revenue of $7.57B (+32.4%) in-line. (PR)
• Diamond Offshore Drilling (DO): Q3 EPS of $2.62 beats by $0.32. Revenue of $908M (+0.9%) vs. $874M. Declares special dividend of $1.875/share. (PR)
• Dow Chemical (DOW): Q3 EPS of $0.24 beats by $0.14. Revenue of $12.05B (+6.4%) vs. $11.85B. "The economic outlook for the rest of 2009 appears to be stabilizing with strong growth in Asia Pacific, especially China, and other emerging geographies. The global economy is now on firmer footing, and, in our view, the U.S. economy is beginning a slow and tenuous recovery, with unemployment continuing to be a drag on consumer spending." (PR)
• EMC (EMC): Q3 EPS of $0.23 beats by $0.02. Revenue of $3.52B (-5.3%) vs. $3.45B. Says customers are signaling more comfort spending their IT budgets. Shares +1.5% premarket. (PR)
• Ensco International (ESV): Q3 EPS of $1.05 beats by $0.01. Revenue of $425M (-31.3%) vs. $439M. (PR)
• Entergy (ETR): Q3 EPS of $2.40 misses by $0.08. Revenue of $2.94B (-25.9%) vs. $3.9B. "We continue to experience the negative effects of the slowed economic recovery." (PR)
• Ericsson (ERIC): Q3 EPS of 0.25kr misses by 0.61kr. Revenue of 46.4Bkr (-5.7%) vs. 49.46Bkr. "Sales of network equipment declined due to lower demand in the current tougher market environment. Despite lower volumes, Network margins remain stable." Shares -8.9% premarket. (PR)
• Fifth Third Bancorp (FITB): Q3 EPS of -$0.20 beats by $0.03. Revenue of $M in-line. "The credit environment remains challenging, and we continue to aggressively work to manage risk in the portfolio." Shares -2.1% premarket. (PR)
• Goodrich (GR): Q3 EPS of $1.12 beats by $0.09. Revenue of $1.65B (-7%) in-line. (PR)
• Hershey Foods (HSY): Q3 EPS of $0.73 beats by $0.06. Revenue of $1.48B (-0.3%) vs. $1.54B. "As we look to 2010, we assume the economic environment for consumers in the U.S. and international markets will continue to be challenging." Shares +2.5% premarket. (PR)
• Huntington Bancshares (HBAN): Q3 EPS of -$0.33 misses by $0.05. Revenue of $M in-line. Shares -2.1% premarket. (PR)
• IMS Health (RX): Q3 EPS of $0.40 beats by $0.04. Revenue of $541M (-5.7%) vs. $522M. (PR)
• Janus Capital Group (JNS): Q3 EPS of $0.05 misses by $0.10. Revenue of $228M (-17.4%) vs. $225M. (PR)
• JetBlue Airways (JBLU): Q3 EPS of $0.04 misses by $0.01. Revenue of $854M (-5.3%) vs. $847M. Shares +1.2% premarket. (PR)
• Kimberly-Clark (KMB): Q3 EPS of $1.40 beats by $0.27. Revenue of $4.91B (-1.7%) in-line. Sees full-year EPS of $4.50-$4.60 vs. consensus of $4.26, citing increased cost savings, better organic sales growth and a further recovery in currency exchange rates. Shares +5.5% premarket. (PR)
• Laboratory Corp. (LH): Q3 EPS of $1.22 beats by $0.07. Revenue of $1.19B (+4.4%) in-line. (PR)
• Legg Mason (LM): FQ2 EPS of $0.30 beats by $0.11. Revenue of $660M (-31.7%) vs. $652M. (PR)
• Logitech (LOGI): FQ2 EPS of $0.11 beats by $0.06. Revenue of $498M (-25.1%) vs. $474M. Sees FQ3 revenue of $575-595M vs. $623M. Shares +7.2% in Zurich. (PR)
• McDonald's (MCD): Q3 EPS of $1.15 beats by $0.04. Revenue of $6.05B (-3.5%) in-line. Comps +3.8%, with U.S. +2.5%, Europe +5.8% and the rest +2.2%. Shares +1.3% premarket. (PR)
• Mead Johnson (MJN): Q3 EPS of $0.53 misses by $0.02. Revenue of $700M (-5.8%) vs. $737M. Shares -8.4% premarket. (PR)
• Merck (MRK): Q3 EPS of $0.90 beats by $0.08. Revenue of $6.05B (+1.8%) in-line. (PR)
• NCR (NCR): Q3 EPS of $0.19 misses by $0.05. Revenue of $1.14B (-17.7%) vs. $1.22B. Sees full-year EPS of $0.45-0.55 vs. $0.67. "The willingness of customers to invest in Q2... did not spill over into Q3. That said, we were more encouraged by the conversations we were having with our customers about Q4 and 2010." Shares -5.9% premarket. (PR)
• New York Times (NYT): Q3 EPS of $0.16 beats by $0.17. Revenue of $571M (-16.9%) vs. $562M. Shares +2.7% premarket. (PR)
• NII Holdings (NIHD): Q3 EPS of $0.69 beats by $0.14. Revenue of $1.14B (-3.5%) in-line. (PR)
• Nucor (NUE): Q3 EPS of -$0.10 beats by $0.05. Revenue of $3.12B (-58.1%) vs. $2.98B. "Our view remains that there has been little improvement in real demand and the uncertainty in our economy is still very high. We also continue to believe that real demand is in for a long, slow recovery." Shares -0.6% premarket. (PR)
• Occidental Petroleum (OXY): Q3 EPS of $1.14 beats by $0.06. Revenue of $4.1B (-41.9%) in-line. Shares +1.2% premarket. (PR)
• Old Republic International (ORI): Q3 EPS of -$0.283 misses by $0.11. Revenue of $959M (+2.4%) vs. $910M. (PR)
• Philip Morris (PM): Q3 EPS of $0.93 beats by $0.02. Revenue of $6.59B (-5.3%) vs. $6.71B. "While we experienced lower organic volume in the quarter, this was largely anticipated given our pricing actions and the on-going impact of the economic crisis on total consumption levels." Shares +0.75% premarket. (PR)
• PNC Financial Services (PNC): Q3 EPS of $1.00 beats by $0.69. Revenue of $4.05B (+144.7%) vs. $3.8B. (PR)
• Potash (POT): Q3 EPS of $0.82 beats by $0.01. Revenue of $1.1B (-64.1%) in-line. Sees Q4 EPS of $0.65-0.85 vs. consensus of $1.18. "The uncertainty among fertilizer buyers has lasted far longer than we anticipated, but cannot continue indefinitely." Shares -2.9% premarket. (PR)
• ProLogis (PLD): Q3 EPS of $0.21 beats by $0.02. Revenue of $274M (-72.3%) vs. $228M. Shares +2.4% premarket. (PR)
• Raytheon (RTN): Q3 EPS of $1.25 beats by $0.09. Revenue of $6.21B (+5.8%) in-line. Shares +0.7% premarket. (PR)
• Reliance Steel & Aluminum (RS): Q3 EPS of $0.57 beats by $0.11. Revenue of $1.24B (-57.1%) vs. $1.34B. Declines Q4 guidance. "We believe that demand is fairly stable at low levels." (PR)
• Reynolds American (RAI): Q3 EPS of $1.24 beats by $0.07. Revenue of $2.15B (-5.3%) in-line. Shares -0.1% premarket. (PR)
• Ryder System (R): Q3 EPS of $0.50 beats by $0.05. Revenue of $1.26B (-20.3%) in-line. Anticipates the weak overall economic environment and protracted freight recession will continue to impact its performance. (PR)
• Schering-Plough (SGP): Q3 EPS of $0.40 in-line. Revenue of $4.5B (-1.7%) in-line. (PR)
• Starwood Hotels (HOT): Q3 EPS of $0.14 beats by $0.04. Revenue of $1.22B (-20.7%) vs. $1.16B. "It is very difficult at this time to provide any definitive point of view on 2010. While business conditions have clearly stabilized, it is very hard to forecast the pace of recovery, especially rate." (PR)
• SunTrust Banks (STI): Q3 EPS of -$0.60 misses by $0.05. Revenue of $1.94B (-21%) vs. $2.11B. Earnings include $131M writedown on debt. Allowance for loan losses +128M to $3.02B. (PR)
• Sybase (SY): Q3 EPS of $0.63 beats by $0.06. Revenue of $293M (+3.3%) vs. $281M. Shares +2.2% premarket. (PR)
• TASER International (TASR): Q3 EPS of -$0.05 misses by $0.02. Revenue of $26.8M vs. $20.9M. Shares -1.2% premarket. (PR)
• Temple-Inland (TIN): Q3 EPS of $0.24 beats by $0.06. Revenue of $885M (-9.3%) vs. $876M. "As we look forward, economic conditions, while still uncertain, have stabilized and appear to be on a slow path to recovery." (PR)
• Terra Industries (TRA): Q3 EPS of $0.45 misses by $0.07. Revenue of $347M (-56.1%) vs. $356M. Shares +0.8% premarket. (PR)
• Thermo Fisher (TMO): Q3 EPS of $0.78 beats by $0.02. Revenue of $2.53B (-2%) in-line. (PR)
• Travellers (TRV): Q3 EPS of $1.61 beats by $0.30. Revenue of $6.3B vs. $6B. Sees full-year EPS of $5.30-5.50 vs. consensus of $5.28. Raises quarterly dividend to $0.33 from $0.30. Authorizes an additional $6B share buyback. "We remain cautious about the magnitude of rate gains that are achievable in the near term given general economic conditions." (PR)
• Union Pacific (UNP): Q3 EPS of $1.02 beats by $0.02. Revenue of $3.67B (-24.2%) in-line. "Business volumes seem to have stabilized, but at very low levels." (PR)
• UPS (UPS): Q3 EPS of $0.55 beats by $0.03. Revenue of $11.15B in-line. Volume of 927M packages, -2.4%. "I'm encouraged by the signs of economic recovery that are becoming apparent, although we still have a long way to go," CEO Scott Davis said. Shares -1% premarket. (PR)
• US Airways (LCC): Q3 EPS of -$0.83 beats by $0.11. Revenue of $2.72B, including $110 from a la carte revenue initiatives, in-line. Shares +3.4% premarket. (PR)
• Xerox (XRX): Q3 EPS of $0.14 beats by $0.02. Revenue of $3.67B (-15.9%) in-line. Sees full-year EPS of $0.55-0.57 vs. consensus of $0.53. (8-K)
• Zimmer (ZMH): Q3 EPS of $0.88 beats by $0.02. Revenue of $976M (+2.5%) vs. $954M. Shares +1.8% premarket. (PR)

Earnings: Wed. After Close

• Alliance Data Systems (ADS): Q3 EPS of $0.83 misses by $0.51. Revenue of $483M (-5%) vs. $500M. Expects 2010 EPS of $6.00 vs. $6.10. Shares -6.3% AH. (PR)
• Amgen (AMGN): Q3 EPS of $1.49 beats by $0.22. Revenue of $3.8B (-2%) in-line. Raises full-year EPS guidance to $4.90-5.05 from $4.80-4.95, vs. $4.88. Shares -3% AH. (PR)
• Ameriprise Financial (AMP): Q3 EPS of $1.03 beats by $0.39. Revenue of $2B (+20%) vs. $2.1B. Debt-to-total-capital ratio of 18.7%. Shares +1.6% AH. (PR)
• Citrix Systems (CTXS): Q3 EPS of $0.43 beats by $0.02. Revenue of $401M (+1%) vs. $400M. Sees full-year revenue up 8-9% sequentially to $1.73B. Shares -3.6% AH. (PR)
• Covanta (CVA): Q3 EPS of $0.28 beats by $0.04. Revenue of $409M (-7%) vs. $388M. Shares +0.3% AH. (PR)
• eBay (EBAY): Q3 EPS of $0.38 beats by $0.01. Revenue of $2.2B (+6%) vs. $2.1B. Shares -4.9% AH. (PR)
• Equifax (EFX): Q3 EPS of $0.57 beats by $0.02. Revenue of $452M (-7%) in-line. Shares -3.2% AH. (PR)
• F5 Networks (FFIV): FQ4 EPS of $0.50 beats by $0.09. Revenue of $175M (+2%) vs. $164M. Shares +8.1% AH. (PR)
• Fidelity National Information Services (FIS): Q3 EPS of $0.46 misses by $0.01. Revenue of $851M (-4%) vs. $870M. Shares -0.4% AH. (PR)
• Fidelity National Financial (FNF): Q3 EPS of $0.32 misses by $0.02. Revenue of $1.5B (+52%) in-line. Shares +0.2% AH. (PR)
• Intersil (ISIL): Q3 EPS of $0.10 in-line. Revenue of $168M (-23%) vs. $162M. Sees Q4 EPS of $0.14-0.17 vs. $0.13. Shares -2.8% AH. (PR)
• Knight Transportation (KNX): Q3 EPS of $0.16 in-line. Revenue of $173M (-17%) vs. $165M. Shares +1.2% AH. (PR)
• Lam Research (LRCX): FQ1 EPS of $0.03 beats by $0.11. Revenue of $319M (+46%) vs. $288M. Shares +3.2% AH. (PR)
• Newfield Exploration (NFX): Q3 EPS of $1.58 beats by $0.24. Revenue of $375M (-45%) vs. $536M. Shares -0.1% AH. (PR)
• Noble (NE): Q3 EPS of $1.63 beats by $0.10. Revenue of $906M (+5%) in-line. Shares +1.1% AH. (PR)
• Novellus Systems (NVLS): Q3 EPS of -$0.03 beats by $0.01. Revenue of $177M (-29%) vs. $172M. Shares +0.9% AH. (PR)
• OSI Pharmaceuticals (OSIP): Q3 EPS of $0.81 beats by $0.49. Revenue of $111M (+18%) vs. $106M. Shares -1% AH. (PR)
• Pactiv (PTV): Q3 EPS of $0.54 beats by $0.03. Revenue of $839M (-9%) vs. $858M. Shares -0.2% AH. (PR)
• QLogic (QLGC): FQ2 EPS of $0.21 beats by $0.03. Revenue of $132M (-23%) vs. $126M. Shares -2.6% AH. (PR)
• Range Resources (RRC): Q3 EPS of $0.26 beats by $0.04. Revenue of $204M (-67%) vs. $261M. Shares -0.2% AH. (PR)
• Skechers (SKX): Q3 EPS of $0.52 beats by $0.17. Revenue of $405M (+1%) vs. $385M. Shares +5.2% AH. (PR)
• Terex (TEX): Q3 EPS of -$0.95 misses by $0.61. Revenue of $1.2B (-51%) vs. $1.3B. Shares -10.5% AH. (PR)
• TriQuint Semiconductor (TQNT): Q3 EPS of $0.10 in-line. Revenue of $173M (-7%) vs. $178M. Shares -19.9% AH. (PR)
• VMware (VMW): Q3 EPS of $0.24 beats by $0.04. Revenue of $490M (+4%) vs. $474M. Sees Q4 revenue of v$540M-560M vs. $523M. Shares +1.6% AH. (PR)

Today's Markets

Asian and European markets followed the U.S. into the red Thursday. Stock futures are marginally lower.

Vale S.A. (VALE) – Analysts at Barclays Plc significantly increased their forecast for iron-ore prices in 2010. In a note to clients, Barclays estimates that prices may rise 20% next year versus a previous estimate of 5%. Shares of the iron-ore producer edged 3% higher to $27.22 on speculation they may benefit the most from price upgrades. In line with the bullish news, one investor rolled a long call position to a higher strike. The trader originally purchased 8,000 calls at the November 25 strike for 71 cents apiece on October 5, 2009. Today, he sold the calls for 2.65 apiece, enjoying net profits of 1.94 per contract. Total profits pocketed on the sale amount to approximately $1,552,000. The investor reestablished a bullish stance on the stock by buying 8,000 calls at the higher December 29 strike for 1.03 apiece. Additional profits will accumulate if shares of VALE rally at least 10% to surpass the breakeven price of $30.03 by expiration in December.

Over the past few weeks, the much acclaimed PPIP program has started to find its way into the news again. Billed as a savior to the much maligned non-agency MBS space, this idea by the Treasury was a relatively solid game plan to bring back liquidity.

During early 2009, very clean 15yr private MBS (think 2003-2004, highly seasoned, less than 1% total delinquencies) was trading in the high eighties to low nineties. Why is this significant? I will explain. Fresh off the credit collapse and stuck with every negative connotation, demand for this product was at an all time low. For the type of paper listed above, and other similar types, 20+% loss adjusted yields were available.

Bullish Calls:

NVIDIA (NVDA): "The stock is only down a dollar from where we recommended it and I want to buy more… NVIDIA is at the cusp of a major new cycle… people tell me that the chart is bad… oh please… it is one of the few semis that is still not expensive… let’s do some buy, buy, buy."

If charts do not come out well, go here.

Follow-up on my May 14 initial post NORTH AMERICAN AND EUROPEAN BANK RANKINGS. I excluded Goldman Sachs (GS) and Morgan Stanley (MS) because their bank status is so recent. All data is translated in US$ based on May 14 exchange rates. To facilitate reading the charts, US banks are in blue, Canadian banks in red and European banks in yellow.

The Ends Justifies the Means

Watching the end of a blowout NFL game and the financial markets close out 2009 could be eerily similar this year. If over the next three months it seems that market participants are simply trying to run out the clock and close this year on a high, you might be absolutely right.

Take a look at the following, which appears in the valuation section of a sell-side report out last week on Fifth Third Bancorp (FITB), initiating coverage with a “Market Perform” rating.

[W]e have opted for a price-to-tangible book value methodology, in light of the uncertainties surrounding earnings and true book value. FITB currently trades at 1.1x tangible book value (TBV), a 66% discount to its historical average of 3.1x, and below the current large-cap regional bank peer group average of 1.8x. [Emph. added]

The recession continues to weigh heavily on banks as U.S. regulators on Friday shuttered three more banks in Michigan, Minnesota and Colorado. This takes the total number of failed federally insured banks this year to 98, compared to 25 in 2008 and 3 in 2007.

The failed banks were Warren, MI-based Warren Bank with about $538 million in assets and $501 million in deposits; Spring Grove, MN-based Jennings State Bank with total assets of $56 million and deposits of $52 million and Pueblo, CO-based Southern Colorado National Bank with about $40 million in total assets and $32 million in deposits.

As posted in Charting the banks on OptionMaestro.com, I was once extremely bullish on the financial stocks. Most of the targets which were unheard of back on May 10, have either been hit or passed. I am currently bearish short term; I believe we will see profits taken over the next month which would cause these financial stocks to move lower. In this article I will describe a way which I have been using (and will continue to use) to capture the downside on the financial sector. To understand the trade described in this article, you'll need a background of trading stock options. To learn more about the option strategy that will be outlined in this article, risks, pricing, calculations, other strategies, and options in general, click here.

Why the financial sector? I chose the financial stocks because they are up the greatest % since the market bottom, and if this sell off continues, we may see the financial stocks suffer the most. The table below shows the performance of 10 financial stocks since March 9, 2009 (closing low on the S&P 500). Stocks are ranked in order from greatest % gain to least. I used data from Google Finance, so I know everyone has access to it as well.

I think it should be abundantly clear that I am bearish on financials given my sell equities call two weeks ago. After all, it was the banking sector which I was most bullish on in April – August. They are also the stocks that have run up the most as well. But now is the time to sell. Why? The conditions which created the bull run are effectively over. Here was the notice that put me over into the bearish camp. It came last week:

US banks will have to pay $45bn in up-front fees to the Federal Deposit Insurance Corporation under a plan presented on Tuesday to shore up the FDIC’s depleted deposit insurance fund. The agency warned it will run out of liquid funds early next year due to bank failures, and said the estimated cost of expected failures from 2009 to 2013 had increased to about $100bn from an earlier estimate of $70bn. Most failures are expected this year and next.

Sentiment

The major averages are deep in the red Thursday, as the historically volatile month of October kicked off with a bang. Two days of disappointing jobs data is partly to blame. A report released before the opening bell on Wall Street showed weekly jobless claims increased by 17,000 to 551,000 last week, which was significantly worse than the 1,000 increase economists had predicted. The news comes the day after ADP reported the economy lost a worse-than-expected 254,000 jobs in September and the day before the Labor Department releases key monthly jobs data Friday morning.

The day's other economic numbers were mixed. Data on personal incomes / spending, pending home sales, and construction spending all exceeded economist estimates. However, the ISM Index, a gauge of manufacturing activity nationwide, showed a decline to 52.6 in September; which was not much changed from the 52.9 in August, but also below economist estimates of 54.0.

Fifth Third Bancorp (FITB) is planning to acquire banks with the assistance of the Federal Deposit Insurance Corporation (FDIC). The company intends to expand within its operating footprint instead of venturing beyond that.

While the company has already evaluated some of the FDIC-assisted purchases, the deposit mix was neither suitable nor large enough. The company intends to acquire such banks with the FDIC’s assistance, which would significantly increase its market share in one or more markets.

Fifth Third Bancorp (FITB - Analyst Report) expects its loan charge-offs to increase in the third quarter primarily due to the increase in charge-offs associated with the Shared National Credit [SNC] examination which has been recently conducted by regulators. The company also expects its non-performing assets to accelerate, though interest income and margins are expected to improve in the second half of 2009.

Fifth Third expects net charge-offs in the third quarter to be approximately $775 million, up from $626 million in the second quarter. This would include approximately $110 million in net charge-offs related to SNC credits compared with $17 million in the second quarter. However, management expects SNC charge-offs to fall in the fourth quarter. Non-performing assets are also expected to increase 20%.

Builder Confidence remains on the mat - The National Association of Home Builders Housing Market Index rose to an anemic reading of 19 in September, well below the 50 neutral reading.

Sunday’s chart of the week, which looked at Implied Volatility of DJIA Components: Now vs. 52 Week High, received enough interest to warrant a follow-up that examines the current implied volatility vs. the 52 week high IV of the 19 financial institutions which were subjected to the government stress tests. [link to stress test results]

The chart below (click to enlarge) sorts the financial institutions from left to right according to their 52 week implied volatility highs, with GM omitted. While not captured in the graphic, I find it interesting that the two institutions whose current IV is the lowest compared to the high IV are Morgan Stanley (MS) at 12.7% of the 52 week high and Goldman Sachs (GS) at 18.9% of the 52 week high. Those institutions whose current IV is closest to the 52 week high (in percentage terms) are BB&T (BBT) at 36.3% and Regions Financial (RF) at 34.6%.

Bespoke blog shows us the top performing stocks in the S&P 500 since March 9th. Note - while the intraday low of 666 was reached March 6th, the S&P 500 closed at 683 that Friday. The true "closing" low was actually that following Monday the 9th when the S&P 500 closed at 676 (lower than the Friday close). However it is much more spooky and cool to say, the market bottomed on the 6th at 666.

Whatever the case, it seems impossible to believe that that bottoming event happened earlier this year; it now feels like it was a few eons ago.

Maverick Capital's most recent portfolio holdings reveal that the long/short orientated hedge fund bought up Computer Hardware, Drug and Banking companies over the 2nd Quarter of 2009, while dumping Telecom, Big Box Retailer and Communication Equipment companies.

Maverick's exposure to US traded equities rose by $915mm over the quarter, ending at $6,444mm. The firm, one of the US’s largest and most revered hedge fund managers, was founded in 1990 by Lee S. Ainslie and Evan, Sam, and Charles Wyly. Before starting Maverick Capital, Mr. Ainslie was a managing director at Julian Robertson’s Tiger Management Corporation. When evaluating companies, the firm typically looks for a combination of value and growth characteristics.