Financials Face Headwinds, GS Downgrades Banks

Today, analysts at Goldman Sachs issued bearish comments on the banking sector, cutting earnings estimates for three of the largest U.S. banks. The analysts commented this morning on recent secondary issues from Bank of America ($BAC), and Wells Fargo ($WFC), Citigroup ($C). They cited recent equity raises were three of the five largest secondaries ever in the history of U.S. business. The total raised to date is $325 billion for the banks according to Goldman.

The biggest use of cash so far has been to pay down borrowing, which has declined by $500 billion, or 21 percent during the year for the banks.

Goldman analysts think the cash will eventually be used to make loans, citing data for the fourth quarter that lending is about even this quarter compared to a 4 percent decline for the third quarter. Commercial loan growth generally resumes one to three years after economic recessions hit bottom.

The firm’s analysts adjusted earnings estimates for the banks as follows:

• Bank of America 2010 earnings per share estimates raised 4 percent to $1.30, 2011 earnings per share dropped 10 percent to $2.25.

• Wells Fargo 2009 earnings estimates cut 21 percent to $1.66 per share, 2010 earnings increased 5 percent to $2.25 per share, and 2011 earnings flat at $3.00 per share.

• Citigroup 2010 earnings per share estimates dropped 3 percent to 20 cents, 2011 earnings reduced 13 percent to 35 cents per share.

Goldman maintains “Buy” ratings on Bank of America and Wells Fargo. Citigroup is Not Rated.

Remaining bank failures could be about 3 percent of the banking system’s total assets, according to the Goldman’s analysts. They base this on historical benchmarks during 1988-1995 regional economic downturns.

These downgrades in the banking sector come on the heels of the Meredith Whitney Advisory Group reducing earnings estimates for investment banks Morgan Stanley ($MS) and Goldman Sachs ($GS) last week. The Group cut fourth-quarter profits expectations for Goldman from $6.38 to $6.00 a share. Goldman’s  2010 earnings were reduced from $21.73 to $19.65 a share and 2011 was cut from $24.04 to $20.60 a share. The Morgan Stanley 2010 estimate was cut from $2.63 to $2.60  a share, while the 2011 forecast of profits was reduced from $3.28 to $2.75 per share.

With the House of Representatives approving a financial system reform bill on December 11 and the Senate poised to take up the issue early in 2010, the broad outlines of what is on the plate for banks is evident. The House bill is nearly 1,300 pages long and represents a stringing together of several bills introduced earlier. It addresses a large spectrum of regulation, from oversight by the Securities and Exchange Commission, shareholder rights, Sarbanes-Oxley compliance, Financial Accounting Standards Board governance, “too big to fail” banks, and other provisions. Banks could find their missions and organization much changed when the final version of this bill reaches the President’s desk for signature.

In related news today, New York Times columnist Andrew Ross Sorkin has noted that leading banks were paying themselves significant fees (roughly 2.5 percent of the offering price) to pay off TARP obligations. Bank of America’s $19 billion offering resulted in $482 million, Citigroup’s $17 billion offering raised $425 million, and Wells Fargo’s $12 billion offering added $276 million in fees.

The bottom line is that the financial sector is facing substantial political and economic headwinds that could lead to lower share prices as we enter the new year. Cautious investors may find it prudent to lighten up on company stock in the financial sector in light of all this negative sentiment.

Weekly Economic and Earnings Preview — Week of December 14

Recession continued to give way to forecasts favoring recovery last week, but investors remain cautious of Wall Street’s mounting confidence that fourth-quarter growth will be better than previously expected.  Investors are conflicted between two contrary ideas. They are thinking the economy and earnings have turned a corner, a good thing for the markets—or the economy still has significant challenges ahead and there is a need to be cautious.  The tension between the two futures has kept stocks churning this month with little gains to report amid low trading volume for this time of the year.

Stock futures in the U.S. point to a higher open as stocks around the world jumped after Abu Dhabi announced it was providing $10 billion to Dubai to help with debt repayments, including those of troubled wealth fund Dubai World. As a result, the S&P 500 index is set for a fourth day of gains.  U.S. equity futures are up about half a percent in pre-market action.

In overseas equity markets this morning, markets were mostly higher. Japan’s Nikkei 225 index ended essentially flat (-0.2%) on Monday. China’s Shanghai Shenzen index jumped 1.1 percent and Hong Kong’s Hang Seng climbed 0.8 percent.

The German DAX index was up 0.8 percent and Britain’s Footsie 100 index was higher by 1 percent on Monday.

February crude oil futures are down almost 2 percent overnight, trading around $69 a barrel just before the market opens today. Traders continue to have concerns about persistently weak demand and large inventories.

Gold futures moved higher Monday morning ($1,122.90, Feb. 2010), rising off of a one-month low. The U.S. dollar fell overnight on the heels of the Abu Dhabi pledge to bail out Dubai, boosting gold’s investment appeal. The price of gold rose half a percent since the Friday close with spot prices at $1,121 an ounce this morning.

Silver, platinum, and palladium were also up about 1 percent each this morning. Copper gained 0.5 percent.

On the economic front, recent positive reports for retail sales, housing, and the labor market  suggest the first credit cycle recession since the 1930s may be turning the corner. The question on investor’s minds is when will the Federal Reserve begin to remove some the monetary accellerant it has rained on the economy and the markets  this year.

The pace of unemployment appears to have stabilized and that has given equity markets a boost, providing ballast to consumer spending and retail sales in November. But the  the unemployment rate remains at 10 percent, near a 26-year high and that means  the Federal Reserve is unlikely to act anytime soon. Still, all eyes will be on the Federal Reserve this week.

The Fed’s rate policy meeting will conclude on Wednesday. The Fed is widely expected to hold the federal funds rate flat near zero percent.  Analysts will be parsing the Fed statement on the economy beyond the regular mantra of, “we continue to expect rates to stay at exceptionally low levels for an extended period“.  If there is new language in the Fed statement, investors will be keen to re-interpret when the Fed might begin to raise interest rates.

The Producer Price index (PPI), a measure of wholesale inflation, will be reported on Tuesday morning. PPI is expected to have risen 0.9 percent in November after rising 0.3 percent in October.

Also on Tuesday morning, the Federal Reserve will report on manufacturing activity. November industrial production is expected to have risen 0.6 percent after rising 0.1 percent in October.

Also on Wednesday, the Consumer Price Index (CPI), a measure of consumer inflation, will be released at 8:30AM from the Commerce Department.  The November CPI is expected to gain 0.4 percent after rising 0.3 percent in October. Core CPI is expected to have risen 0.1 percent in November after rising 0.2 percent the previous month.

The Department of Commerce will release housing related data on Wednesday.  Housing starts are expected to gain at a rate of 575,000 annual units in November, up from a 529,000 unit annual rate in October.

On Thursday, the November index of leading economic indicators from the Conference Board is expected to have risen 0.7 percent after rising 0.3 percent in October.

Traders are expecting increased volatility this week due to quadruple options expiration day on Friday, a quarterly event in which stock index futures and options, and individual stock futures and options all expire on the same day.

It will be a mostly quiet week on the earnings front, with just 9 S&P companies reporting.

Best Buy ($BBY) will report quarterly earnings before the start of trading on Tuesday.  The electronics retailer is expected to report 42 cents per share in profits versus 35 cents a year earlier.

On Wednesday, mining equipment manufacturer Joy Global ($JOYG), is expected to report earnings per share of $1.01, down from $1.23 per share last year.

Thursday will be busy on the earnings front with package-delivery firm FedEx ($FDX) reporting its financial results before the market opens. FedEx is expected to have earnings per share of $1.04 compared to $1.58 a year ago in the same quarter.

Also on Thursday, wireless company Research in Motion ($RIMM) will be reporting profits with consensus expectations of $1.04 per share. Last year’s earnings were $1.03 per share.

General Mills ($GIS) is expected to report profits per share of $1.45 versus $1.36 a share in the same quarter from a year ago.

After the close Thursday, Oracle ($ORCL) is expected to report a profit of 36 cents per share versus 34 cents a year ago.

Other companies expected to report earnings growth this week include, Adobe Systems ($ADBE), Carnival Corp. ($CCL), Darden Restaurants ($DRI), Discover Financial ($DFS), Hovnanian Enterprises ($HOV), Nike ($NKE), Palm ($PALM), Rite Aid ($RAD), Scholastic ($SCHL) Take-Two Interactive Software ($TTWO), Pier 1 Imports ($PIR), and Winnebago Industries ($WGO).

Investors Look for Positive Signs in Retailer Earnings

Investors will be looking to retail earnings this week for signs about consumer spending during this holiday season. This is a big week for retailer earnings with six major retailers reporting. The average consensus estimate for five of the six retailers reporting is expected to be positive. If these six retailers can beat consensus estimates, it will give more legs to the belief that a strong recovery is at hand. Earnings misses by these companies could be a sign that the economy cannot sustain economic growth into 2010.

Despite strong third-quarter gross domestic product (GDP) growth, expanding at a 3.5 percent pace according to the Department of Commerce, economists remain skeptical about whether economic growth will continue into 2010. Most economists believe the consumer is key to a sustainable U.S. economic recovery. On the one hand, consumer spending grew 3.4 percent in the third quarter. But a significant share of consumer spending growth was due to the government’s temporary “Cash for Clunkers” program. A more ominous clue about the future was that government spending and a reduction in imports dominated the third-quarter boost in GDP growth.

There are two obstacles to increased consumer spending. The first is job creation. The unemployment rate at 10.2 percent reached a 26-year high in October according to the Labor Department. Moreover, employers cut 190,000 jobs in October. Analysts had expected payrolls to drop by 175,000 and the unemployment rate to increase to 9.9 percent from 9.8 percent. Payrolls have declined for 22 consecutive months. Lost jobs total 7.3 million since the start of the recession in December of 2007. But the jobs headwind goes beyond the numbers. Consumer spending is also dampened by those who are afraid of losing their jobs.

The second obstacle is the historically high household debt load. Consumer credit declined by $10.0 billion in September vs. a giant $19.5 billion contraction in August. September is the eighth consecutive month of declines in consumer credit. This is on a baseline of $2.47 trillion outstanding consumer credit for September. Outstanding consumer credit peaked at $2.59 trillion in the fourth quarter of 2008 (see chart).

It is hard to imagine a robust recovery going forward if households are reining in credit and increasing saving. If households are saving, they are not spending. Less credit expansion dampens the economic recovery.

Retailers monthly sales data were released last Thursday underlining the cautious mood of consumers. Many retailers show flat or declining sales against lows from a year ago. largely on consumer fears for their jobs and increased household saving.

Last week, Macy’s, the largest U.S. department store chain, reported comparable sales decreasing 0.8 percent from October 2008 at stores open for at least a year. Abercrombie & Fitch saw comparable sales fall 15 percent. American Apparel reported a 6 percent decline. Aeropostale saw a 3 percent gain. Discount retailer Target reported sales down slightly at 0.1 percent. Sales at JC Penney decreased 4.5 percent. Sales at Kohl’s increased 1.4 percent. Fashion retailer Nordstrom reported a 6 percent increase in same-store sales.

These muted results by retailers indicate growing caution by consumers going into the holiday season. The cautious consumer is creating growing concerns about major retailers as well as the economy. That is why this week’s retailer earnings are so important.

On Wednesday, Macy’s $M will release earnings. The consensus estimate is a 10 cent loss per share.

The world’s largest retailer, Walmart Stores $WMT reports earnings on Thursday. Analysts are expecting 81 cents per share in profits.

Also on Thursday, Kohl’s $KSS will report with earnings per share expected to come in at 61 cents.

Nordstrom $JWN also reports on Thursday with earnings per share expectations of 37 cents.

Reporting on Friday is J.C. Penney’s $JCP with consensus earnings per share at 12 cents.

Abercrombie & Fitch $ANF will also be reporting on Friday with consensus expectations of 20 cents.

Self Directed Investors – 6 Things We Want from IROs

Investors are still reeling from the string of failures in the regulatory regime and financial markets over the past decade. We have lost trust in government regulators, corporations and our financial advisers. This is a key trend and presents an opportunity for investor relations officers (IROs) to improve how investors view their company.

A direct result of the loss of trust is that a growing percentage of us are moving away from passive investing to self directed investing. Self directed investors want respect, equal access to information and transparency from companies where we invest our hard earned money.

Can You Blame Us?

We’ve seen corporate scandals at Enron and WorldCom, the collapse of industry giants like Lehman Brothers & Bear Stearns, the failure of diversification and rebalancing to protect our nest eggs, the failure of buy and hold over the past decade, record portfolio losses and the Bernie Madoff scandal. Discussions in Washington D.C. about holding wayward companies accountable to the government are met with cynicism. The loss of trust by investors in government, corporations and financial advisers has spurred an exodus of people from traditional brokers to online brokers. More of us are making the jump from passive investors to self directed. We trust ourselves when it comes to managing our money and no one else.

Who Are Self Directed Investors?

Self directed investors rely on our own research and contacts to get the latest information on companies. We go beyond company earnings reports and websites. We call IROs, CFOs and even CEOs and seek out anyone who can assist us in getting a comprehensive understanding of a company’s financial position, strategies and outlook. Many of us are working or retired professionals (physicians, lawyers, engineers) turned investor. Some of us are retired CFOs and CEOs, who know plenty about your industry and your company.

Self directed investors have different resources, financial goals, objectives and strategies. Some have low six figure accounts, some seven figure—and some even have eight figure accounts. Some are dividend hounds. Others are looking for the proverbial “ten-bagger.” Some use swing and position trading techniques. Many adopt a combination of strategies. As a group, we share the goal of reaching financial success on our own terms. We are confident in our abilities—comfortable using the Internet and online brokers.

What Do We Want?

So what exactly do self directed investors want from IROs and the companies they represent? These six things:

1. Obey the law and live within the spirit of Reg FD. That means providing equal access to information that analysts and fund managers routinely receive on key material questions. Analysts and fund managers enjoy plant tours and access to nuanced information through personal interactions with senior management. Offer something similar that reaches a wider audience such as videos of plant tours, online calculators to help investors play “what if” scenarios with things like book value, EBITDA, enterprise value, return on capital, return on investment, etc.

2. Call us back and respond to our emails. Treat us with respect. We are owners of the company. In the case of smaller companies, we may be large shareholders in regular communication with other large shareholders. We share what we learn with one another.

3. Provide regular news updates—good and bad—on the progress of significant projects. There is no excuse for going several months without a news update on ongoing projects.

4. Present all material information in earnings releases, not just selected information. We don’t think you are complying with Reg FD if you announce material information on a conference call and not in a press release.

5. Update your website in a timely fashion and highlight material information above the fold on your home page within an hour of significant developments. Any governmental or legal inquiry or adverse action should be highlighted on the web page immediately.

6. If your company pays a dividend, provide online guidance for regular ex-dividend dates. If you don’t know, a range of dates is sufficient. After announced, provide the amount of the dividend. Provide a historical table of past dividends and pay out rates going back at least five years.

How Can We Help IROs?

In a world of emerging social media, active self directed investors are increasingly influencing the market perception of your company. We seek out and talk to other self directed investors and post our impressions on blogs, Twitter and password protected social media sites. We have no hesitation in vouching for your company if we feel we’ve been treated fairly and honestly by IROs and company officers. Self directed investors can also provide a loyal shareholder base as your company earns a reputation for equal access to information and transparency.

In short, self directed investors can be real assets for expanding your company’s investor base—a win-win proposition for self directed investors and IROs.