Schwab is returning to the NYSE to join its natural comparative set of household names in financial services. Schwab had moved from the NYSE to the Nasdaq Stock Market in 2005, when the battle of switch-over listings between the exchanges accelerated.

Headquartered in San Francisco, CA, Charles Schwab is a leading provider of securities brokerage, banking, and other financial services to individual investors, institutional clients and other broker-dealers.

Schwab’s fourth quarter 2009 earnings of 14 cents per share were a penny short of the Zacks Consensus Estimate. However, this compares unfavorably with earnings of 27 cents in the year-ago quarter. The earnings for the quarter were also consistent with Schwab’s estimate in mid-December.

Schwab continues to be in good financial shape despite the deteriorating financial environment, with multiple sources of liquidity, a sound capital position, and a quality balance sheet that enabled it to end 2009 with solid client metrics.

Furthermore, the company aims at protecting its financial strength and operating performance by managing expenses even more aggressively in the coming quarters. Management expects reductions in staffing (focused on non-client service roles), along with reductions in professional services, development projects, and certain aspects of the company’s marketing activity.

We suspect that the results of Schwab will continue to be impacted by the challenging market conditions. However, stronger client trading activity resulting from increased market volatility and management’s aggressive efforts to control cost will provide some support in the upcoming quarters.

Zacks Investment Research

(SCHW) Charles Schwab To Be Traded on New York Stock Exchange

As a result of constrained liquidity and other challenges in the market as a whole, Interactive Brokers experienced lower operating results during the reported quarter. Results for the quarter have been largely impacted by competitive pressure on spreads. However, the balance sheet remained highly liquid with relatively low leverage. Interactive Brokers actively managed its excess liquidity and maintained significant borrowing facilities through the securities lending markets and banks. Both revenue and earnings were down sequentially as well as year-over-year.

Estimate Revisions Trend

Over the last 7 days, five of the eight analysts covering the stock lowered estimates for full year 2010, while one moved inthe opposite direction. Currently, the Zacks Consensus Estimate for 2010 is a gain of $1.19 per share, which would be a substantial improvement over full-year 2009 earnings of 87 cents. In 2008, Interactive Brokers had earned $2.24 per share.

The lower number of estimate revisions for 2010 in the upward direction indicates a likelihood of downward pressure on theperformance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 5 Rank, which translates into a short-term ‘Strong Sell’ rating. However, considering the current fundamentals of Interactive Brokers, we maintain a long-term “Neutral” recommendation on the stock.

With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with only one positive and three negative surprises. For fourth quarter 2009, the earnings surprise was negative 76%. However, the average remained negative at 37%. This implies that Interactive Brokers has fallen short of the Zacks Consensus Estimate by 37% over the last four quarters. The current Zacks Consensus Estimates for the first quarter and full-year 2010 are earnings of 19 cents and $1.19, respectively. The downside potential of the estimate for full-year 2010, essentially a proxy for future earnings surprise, currently stands at 13%.

Quarter in Detail

Interactive Brokers’ net revenues for the quarter decreased 53.3% year-over-year to $200.4 million. The decrease in net revenues was mainly due to a 74.8% decrease in trading gains to $75.1 million and a 49.7% decrease in interest income to $31.9 million. Commission and execution fees for the quarter were up 2.2% on a year-over-year basis to $89.5 million.

Net income (before income taxes and minority interest) decreased 80.6% on a year-over-year basis to $52.2 million. Pre-tax profit margin for the quarter was 26%, compared to 63% in the prior-year quarter.

Total non-interest expenses for the quarter decreased 7.5% year-over-year to $148.2 million. The decrease in non-interest expenses was due primarily to a 8.8% decrease in execution and clearing expenses and a 57.2% decrease in general and administrative expenses.

Interactive Brokers’ net income available to common shareholders decreased 88.7% year-over-year to $2.3 million.

Market Making: During the reported quarter, net revenues in this segment decreased to $75.2 million from $308.8 million in the year-ago quarter. Loss before income taxes came in at $3.5 million, compared to an income of $221.6 million in the prior-year quarter. Pre-tax operating margin for this segment decreased to negative 5% from positive 72% in the prior-year quarter. The options contract volume for this segment decreased 23.5% year-over-year to 97,520 contracts.

Electronic Brokerage: During the quarter, net revenues in this segment increased 5.4% year-over-year to $125.1 million. Income before income taxes increased 43.3% year-over-year to $61.6 million. Pre-tax operating margin for this segment came in at 49% compared to 36% in the prior-year quarter. Customer accounts during the quarter increased 20.7% year-over-year to 134,000 and customer equity grew 70.8% year-over-year to $15.2 billion. Total customer daily average revenue trades (DARTs) were down 7.0% year-over-year to 346,000. The year-over-year growth in income was driven by robust customer trading and a greater number of customer accounts.

Interactive Brokers continues to maintain a highly liquid balance sheet with low leverage and a strong capital position. Though the company’s fundamentals are strong with lower barriers to entry, sizeable international exposure and the ongoing weakness in equity markets will continue to impact profitability in the upcoming quarters.

Zacks Investment Research

(IBKR) Interactive Brokers Group Misses Expectations Again

E*TRADE reported a fourth-quarter net loss of $67.1 million, compared to a loss of $275.6 million a year earlier.

The loss of the online broker reduced from the year-ago quarter, primarily due to lower provision for loan losses. Results were also supported by higher revenue and lower operating expenses. According to the Chairman and interim CEO, E*TRADE has positioned itself for sustainable growth by successfully recapitalizing the balance sheet and maintaining its focus on the online brokerage business.

Estimate Revisions Trend

There were no estimate revisions in either direction over the last 7 days. Over the last 30 days, one of the 15 analysts covering the stock lowered estimates for full year 2010, while one moved in the opposite direction. Currently the Zacks Consensus Estimate for 2010 is for a one-cent loss, which would be a substantial improvement over the full-year 2009 loss of $1.18 per share. In 2008, E*TRADE had a loss of $1.58 per share.

The same number of estimate revisions for 2010 in both directions indicates no clear directional pressure on the performance of the stock in the upcoming quarters. As a result, our long-term recommendation on the stock remains “Neutral”.

With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with two positive and two negative surprises. However, the average remained negative at 11%. This implies that E*TRADE has fallen short of the Zacks Consensus Estimate by 11% over the last four quarters. The surprise outlook for the coming quarters needs to be taken with a pinch of salt given the extremely low earnings numbers involved. The current Zacks Consensus Estimates for the first quarter and full-year 2010 are losses of 2 cents and one cent, respectively. The upside potential of these estimates, essentially a proxy for future earnings surprises, currently stands at 50% and 200% for the first quarter and full-year 2010, respectively.

Quarter in Detail

Total revenue for the quarter decreased 9.0% sequentially but increased 7.6% year-over-year to $523.4 million. The year-over-year increase in revenue was due primarily to lower other-than-temporary impairment (OTTI) and higher fees and service charges. For full year 2009, total revenue increased 15.1% over 2008 to $2.2 billion.

The performance of E*TRADE’s online brokerage business was impressive for the full year, with total daily average revenue trades (DARTs) of 197,000, up 4.8% from 188,000 in 2008. However, for the reported quarter, total DARTs decreased 12.0% sequentially and 20% year-over-year to 174,000.

Net interest income was down marginally but up 17.1% year-over-year to $321 million. Net interest income was almost flat sequentially as a $459 million decline in average interest-earning assets to $43.8 billion was largely offset by a 4 basis point expansion in the net interest income spread to 2.86%.

E*TRADE’s provision for loan losses for the reported quarter decreased 15.8% sequentially and 43.0% year-over-year to $292 million.

Total operating expense increased 5.5% sequentially but decreased 0.9% year-over-year to $318 million. The sequential increase was due primarily to charges associated with the restructuring of E*TRADE’s international operations, seasonal advertising, and higher real estate owned (REO) expenses.

E*TRADE continued to make progress in reducing balance sheet risk as its loan portfolio contracted by $1.1 billion from last quarter, of which $0.8 billion was due to prepayments or scheduled principal reductions.

E*TRADE continues to maintain Bank capital ratios well above the regulatory well-capitalized thresholds. As of Dec 31, 2009, E*TRADE reported Bank Tier 1 capital ratios of 6.69% to total adjusted assets and 12.79% to risk-weighted assets.

E*TRADE did not receive bailout from the government during the height of the financial crisis. In fact, last year, it declined $800 million as part of the government’s $700 billion financial bailout program. E*TRADE is rumored to be a takeover target of its peers Charles Schwab Corp. (SCHW) and TD Ameritrade Holding Corp. (AMTD). Both the competitors reported profit declines in the latest quarter.

Zacks Investment Research

(ETFC) E*TRADE Financial Corporation Reports Earnings In Line – Trims Loss

The year-over-year decrease in earnings was due primarily to a 23.2% decline in net revenue to $986 million. Net revenue decreased primarily as a result of lower net interest revenue (down 18.0%) and asset management & administration fees (down 17.4%).

Falling interest rates significantly impacted the revenue during the quarter. Schwab has been forced to waive fees on money market funds due to the historically low rates. Money market fund fee waivers increased to $110 million in the reported quarter from $78 million in the prior quarter. However, this has been partially offset by cost containment measures.

For full year 2009, Schwab’s net income was $787 million or 68 cents per share, compared to $1.2 billion or $1.05 in the year-earlier period.

Though client trading activity remained healthy in 2009, there was a 7.8% drop in trading revenue to $996 million for the full year.

Net income for the quarter decreased 18.0% sequentially and 46.8% year-over-year to $164 million.

Total non-interest expense increased 4.2% sequentially but decreased 7.3% year-over-year to $720 million. The year-over-year decrease in non-interest expense was a result of expense reduction initiatives. The expense reduction initiatives have enabled Schwab to achieve a pre-tax profit margin of 27.0% for the reported quarter.

As of Dec 30, 2009, Schwab had total client assets of $1.4 trillion (down approximately 25.1% year-over-year). New client assets decreased 14.3% to $24.8 billion compared to $21.7 billion the prior-year period.

Net Investor Services accounts for the reported quarter decreased 30.0% year-over-year to approximately 36,000. As of Dec 30, total accounts were up 3% year-over-year, reaching 5.4 million.

Annualized return on equity for the quarter came in at 13%, down from 17% in the prior quarter and 30% in the prior-year quarter.

We suspect that the results of Schwab will continue to be impacted by the challenging market conditions, while the stronger client trading activity resulting from increased market volatility and management’s aggressive efforts to control cost will provide some support in the upcoming quarters. On Tuesday, the share price of Schwab was up by about 1.5%, closing at $19.29 on the New York Stock Exchange.

Zacks Investment Research

(SCHW) Charles Schwab Corporation Misses Expectations by a Penny

The new fees will be applicable to Schwab’s investors with accounts of less than $1 million and who execute fewer than 120 trades in a year. Previously, these smaller investors had paid $12.95 per trade plus charges for trades larger than 1,000 shares. The change in trading fees could reduce Schwab’s first-quarter revenue by $15 million to $20 million.

However, there will be a surcharge of $5 for automated phone trades and $25 for broker-assisted trades. Schwab has already waived the minimum fees required for accounts and reduced expenses on certain mutual funds. The fee waiver is expected to cost the company more than $100 million in revenue in the fourth quarter. Schwab expects fourth-quarter earnings to be hurt by a slowdown in trading volumes.

However, things remain solid at Schwab from a financial perspective, having improved noticeably over the last couple of years. Earnings continue to benefit from management’s aggressive efforts to control cost. Return on equity (ROE) has improved dramatically for three years since 2004 and reached 55% in 2007, but declined to 31% at the end of 2008 mainly due to the economic slowdown and challenging market conditions. Improvement in certain metrics has been hindered by numerous fee cuts, but we continue to see these moves as important in the long run from a competitive standpoint.

We suspect that results of Schwab will continue to be impacted by the challenging market conditions and weakening economy, while the stronger client activity resulting from increased market volatility and management’s aggressive efforts to control cost will provide some relief in the coming quarters.

Zacks Investment Research

(SCHW) The Charles Schwab to Slash Trading Fees

Though markets are in a recovery mood, Charles Schwab’s daily trading volume in November has dropped 27% from the prior-year period and 11% from Oct 2009. The company also expects to waive about $108 million in fees on its money market funds, up from a previous forecast of about $100 million. Management fee waivers on its proprietary money market mutual funds could increase by about $30 million from total waivers of $78 million in the prior quarter.

Schwab is highly sensitive to interest rates. Low interest rates have been a drag on the company’s revenue since the Federal Reserve lowered its benchmark interest rate to a record low of near zero last December. Near-zero U.S. interest rates have forced the company to waive fees it charges clients for managed funds. Until the economy improves and interest rates begin to move up, which we don’t expect to happen in near future, the company will continue to face a drain in its revenues.

However, things remain solid at Charles Schwab from a financial perspective, having improved noticeably over the last couple of years. Earnings continue to benefit from management’s aggressive efforts to control cost. Return on equity (ROE) improved dramatically for three years since 2004 and reached 55% in 2007, but declined to 31% at the end of 2008 mainly due to the economic slowdown and challenging market conditions. Improvement in certain metrics has been hindered by numerous fee cuts, but we continue to see these moves as important in the long run from a competitive standpoint.

We suspect that results will continue to be impacted by the challenging market conditions and weakening economy, while the stronger client activity resulting from increased market volatility and management’s aggressive efforts to control cost will provide some support during the coming quarters. As such, we maintain a Neutral recommendation on the shares.

Zacks Investment Research

(SCHW) Charles Schwab Corporation Provides Weak Outlook

Just over a month ago, I pegged E*Trade Financial (Nasdaq: ETFC) as a takeover target.

However, after reviewing the company’s most recent results, you might consider my prediction laughable…

On Tuesday, E*Trade reported its ninth straight quarterly loss. And this one was a doozie. Over $830 million in red ink flooded the bottom line. Keep in mind that E*Trade’s market cap checks in at a mere $1.75 billion.

Again, I get that it’s not obvious why anyone would want to buy a company chalking up quarterly losses equivalent to roughly half its market value. But we can’t rely exclusively on headline numbers to guide our investment decisions – because they never tell the whole story.

And ironically, in this case, the whopping loss actually underscores E*Trade’s takeover appeal. Here’s why…

E*Trade Pays Now in Order to Set Up Profits Later

Dig into E*Trade’s results and you’ll find a one-time, pre-tax charge of $968 million, related to “refinancing.”

Strip it out, and E*Trade only lost $59 million, or five cents per share. And that’s a dramatic improvement from last quarter’s loss of 22 cents per share.

Essentially what E*Trade did was swap $1.75 billion in bonds due in 2011 and 2017 for new loans that can eventually be converted into common stock.

Sounds complex, I know. But don’t worry about all the details. Here are the most important takeaways:

• The debt exchange slashes E*Trade’s annual interest expenses by more than 50%.
• It pushes out any significant debt maturities until 2013.

And when we add in recent asset sales and a stock offering that netted the company a total of $765 million in cash, E*Trade now possesses all the financial breathing room it needs to weather its ill-advised foray into real estate lending and return to profitability.

And that’s not just my opinion.

As management proclaims, “[We are] confident that we have adequate cushion against any reasonably foreseeable losses in our own portfolio.”

But if you’d rather get an unbiased opinion, look no further than federal banking agency regulations. With a Tier 1 Capital Ratio of 6.72%, E*Trade now ranks as “well-capitalized.”

In short, E*Trade’s big loss is a symptom of making a necessary change in order to ward off bankruptcy once and for all. It had nothing to do with poor execution or rapidly deteriorating fundamentals. In fact, on the contrary, the company’s underlying fundamentals keep improving.

The One Thing Delaying A Takeover of E*Trade

Aside from insolvency concerns, the only other thing that’s delayed a takeover of E*Trade is its cumbersome real-estate loan portfolio. Like many other banks, it suffered heavy losses as the real-estate market soured. And potential suitors wouldn’t even consider a deal until E*Trade could get a handle on these losses.

But it’s starting to clear out some of the mess.

E*Trade’s provision for loan losses checked in at $347 million this quarter – down 14% from the previous quarter and 33% from a year ago. Charge-offs declined 9%. Delinquencies leveled off, too.

And with a firm grasp on the potential real estate losses, suitors can now quantify the risk and get to work putting a price tag on the assets they covet most – E*Trade’s brokerage accounts.

Two Potential Suitors for E*Trade’s Crucial Brokerage Business

Remember, beneath the muck of E*Trade’s real-estate portfolio rests a solid and rapidly expanding brokerage business.

In fact, during a terrible year for stocks in 2008, E*Trade managed to grow its account base by 6% and added $6.4 billion in customer assets. And that strength continues today…

• Quarterly revenue increased 52% as investors returned to the markets and traded more.
• Daily average revenue trades (DARTS) topped 196,000 – a 7% quarter-over-quarter increase.
• The average commission per trade increased to $11.50.

When all said and done, E*Trade offers suitors the opportunity to add 4.5 million customer accounts, with $148.7 billion in customer assets in a single day.

To put that in perspective, it would take them a decade (or more) to grow that much organically. And it would cost considerably more, too.

You see, thanks to the real-estate portfolio, E*Trade’s assets are going cheap. At current prices, suitors can scoop up shares at a 63% discount to the industry price-to-book ratio and a 79% discount to the price-to-sales ratio.

Ultimately, I’m convinced that will prove to be too good of a bargain to pass up.

As for suitors, TD Ameritrade (Nasdaq: AMTD) is the most likely. Why?

• It just reported a $157 million profit and is sitting on a cash stockpile of $1.14 billion.
• It has expanded via acquisitions before. And management recently confessed, “We plan to use our strong financial position to take advantage of new opportunities to deliver additional growth.” That’s a Wall Street euphemism for “We’re out hunting for acquisitions.”

Of course, a formal offer could trigger a bidding war with Charles Schwab (Nasdaq: SCHW).

Regardless, the only way to profit will be to own E*Trade shares in advance. So don’t delay. Despite what the headlines say, E*Trade’s takeover appeal keeps improving. And I don’t expect it to remain independent much longer.

Good investing,

Louis Basenese

View original at: Investment U

(ETFC) E*Trade Financial: Why This Company’s Takeover Prospects Keep Improving

As the result of constrained liquidity and other challenges in the market as a whole, the company experienced lower operating results during the reported quarter. Results for the quarter have been largely impacted by competitive pressure on spreads. However, the balance sheet remained highly liquid with relatively low leverage. The company actively managed its excess liquidity and maintained significant borrowing facilities through the securities lending markets and banks. Both revenue and earnings were down sequentially as well as year over year.

Net revenues for the quarter decreased 45.4% year over year to $271.5 million. The decrease in net revenues was mainly due to 57.2% decrease in trading gains to $154.7 million and 70.4% decrease in net interest income to $29.9 million. Commission and execution fees for the quarter were down 9.4% on a year-over-year basis to $89.0 million.

Net income (before income taxes and minority interest) decreased 61.7% on a year-over-year basis to $133.1 million. Pre-tax profit margin for the quarter was 49%, compared to 70% in the prior-year quarter.

Total non-interest expenses for the quarter decreased 7.5% year over year to $138.4 million. The decrease in non-interest expenses was due primarily to 16.2% decrease in execution and clearing expenses.

Net income available to common shareholders decreased 68.8% year over year to $8.5 million.

Market Making: During the reported quarter, net revenues in this segment decreased 58.2% year over year to $150.3 million. Income before income taxes decreased 73.6% year over year to $75.7 million.  Pre-tax operating margin for this segment decreased to 49% from 79% in the prior-year quarter. The options contract volume for this segment decreased 23.6% year over year to 156,352 contracts.

Electronic Brokerage: During the quarter, net revenues in this segment decreased 9.7% year over year to $121.5 million. Income before income taxes decreased 2.8% year over year to $62.1 million. Pre-tax operating margin for this segment came in at 51% compared to 47% in the prior-year quarter.  Customer accounts during the quarter increased 19.6% year over year to 128,000 and customer equity grew 42.6% year over year to $13.4 billion.  The year-over-year growth in income was driven by robust customer trading and a greater number of customer accounts.

The company continued to maintain a highly liquid balance sheet with low leverage and a strong capital position. Though the company’s fundamentals are strong with increasing pre-tax profit margin due to its technological excellence, lower barriers to entry, sizeable international exposure and the recent weakness in equity markets will continue to impact profitability in the upcoming quarters. As such, we are maintaining our Neutral recommendation on the shares.

Zacks Investment Research
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(IBKR) Interactive Brokers Group Falls Short

The year-over-year decrease in earnings was due primarily to a 19.2% decline in net revenue to $1.0 billion. Net revenue decreased primarily as a result of lower net interest revenue (down 34.2%) and asset management & administration fees (down 24.3%), partly offset by noncredit portion of loss recognized in other comprehensive income of $41 million.

Falling interest rates and lower equity market valuations significantly impacted the revenue during the quarter. However, these have been partially offset by cost containment measures.

Client trading activity slowed modestly from the prior-year levels, leading to a 4.4% drop in trading revenue to $241 million.

Net income for the quarter decreased 2.4% sequentially and 34.2% year-over-year to $200 million.

Total non-interest expense decreased 7.9% sequentially and 8.1% year-over-year to $691 million as a result of expense reduction initiatives. This implies that the company is on track to achieve its target expense reduction of 7%–8% year-over-year in the fiscal year 2009. The expense reduction initiatives have enabled the company to achieve a pre-tax profit margin of 31.7%.

As of Sept. 30, 2009, Charles Schwab had total client assets of $1.4 trillion (down approximately 4.5% year-over-year). New client assets decreased 18.4% to $19.9 billion compared to $24.4 billion the prior-year period.

Net new accounts under Investor Services increased 41.0% year-over-year to approximately 29,000. As of Sept. 30, total accounts were up 3% year-over-year, reaching 5.3 million.

Annualized return on equity for the quarter came in at 17%, down from 18% in the prior quarter and 31% in the prior-year quarter.

We suspect that results will continue to be impacted by the challenging market conditions and weakening economy, while the stronger client activity resulting from increased market volatility will provide some support during the upcoming quarters.

As such, the shares of Charles Schwab carry a Neutral recommendation from us.

Zacks Investment Research
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(SCHW) Charles Schwab Misses Forecasts by a Penny

Geely Automotive is the Hong Kong-listed arm of Chinese automaker Geely Holding. Goldman Sachs Capital Partners will buy convertible bonds and warrants issued by Geely’s Hong Kong-listed subsidiary. The deal is almost complete, but some technical details of the investment are still pending. Confirmation of the deal could be announced as early as this week.

Geely plans to use the proceeds from the Goldman investment to boost its production capacity, which could free up capital for its parent to bid for Volvo. Geely’s parent company has made global headlines in recent weeks after contemplating a bid for Volvo, the Swedish car brand owned by Ford Motor Co. (F). A successful deal would boost Geely’s profile and give it access to Volvo technologies, which it needs to upgrade its cars.

Geely’s parent had also approached Canadian auto parts maker Magna International, Inc. (MGA) about a potential production partnership on Opel.

Earlier this month, General Motors agreed to sell a 55% stake in carmaker Opel to a group led by Magna. However, it is understood that the $250 million investment will be earmarked to treble annual production at Geely’s flagship car plant in Hunan province to 150,000 units.

The investment in Geely will result in the private equity fund owning a minority stake of about 15% of the Hong Kong-listed company, with the precise level determined when the warrants are exercised. Trading in shares of Geely was suspended last week in Hong Kong’s Hang Seng exchange as investors awaited an official statement about the investment.

Chinese automakers are rapidly growing in size and ambition, and the investment underscores rising international belief that, given the right financial support and expertise, they could emerge as global champions. Chinese demand for cars has been robust and on the rise boosted by Beijing’s policy initiatives, including sales tax cuts on small cars and subsidies for rural buyers.

Hyundai Motor Co. Ltd., Toyota Motor Corp. (TM) Honda Motor Co. Ltd. (HMC) and Volkswagen have all witnessed strong growth from their joint ventures in China. In fact, China’s Association of Automobile Manufacturers estimated that domestic auto sales could exceed 10 million units in the first 10 months of this year.

Zacks Investment Research
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(GS) Goldman Sachs Group to Invest in Chinese Carmaker

Goldman’s well-diversified business model, coupled with a more favorable operating environment resulting from improved equity markets, led to strong growth in fixed income and a turnaround in investment banking activity.

Though losses from the commercial real estate portfolio will likely weigh on the results in the near term, we think Goldman’s sturdy capital and liquidity will lead to increased profitability from newer opportunities once the economy recovers.

Zacks Investment Research
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(GS) Goldman Sachs – Bull of the Day

Company Description

Goldman Sachs Group is a financial services firm offering investment banking, securities and investment management services to corporations, governments and high-net-worth individuals.

Zacks Consensus Estimates Spiking

There hasn’t been much news out of Goldman Sachs since I last reviewed the company in July. But analysts continue to be extremely bullish on the company and estimates are jumping.

The third quarter Zacks Consensus Estimate rose 8 cents in just the last 7 days to $3.49 per share. That is up from $2.57 per share 90 days ago.

The outlook for the full year has also drastically changed in the last 3 months as the full year Zacks Consensus Estimate jumped nearly 30% to $16.17 from $12.45. It is up 20 cents in just the prior 7 days as 2 out of 19 analysts raised.

The company is scheduled to report third-quarter results on Oct 14.

Will the Third Quarter Be Another Record?

On July 14, Goldman Sachs reported record revenue for the second quarter which was a result of outstanding gains in the Trading and Principal Investments business segment which jumped 93% from the year ago period.

Several of its other segments saw recovery but not to 2008 levels. Investment banking was still 15% under the year ago quarter and the mergers and acquisition segment saw revenues decline 54% year over year.

Value Fundamentals

Goldman Sachs is a Zacks #1 Rank (strong buy) stock. It has a price-to-book ratio of just 1.59. Its 5-year average return on equity (ROE) is a stellar 22.55%.

Check out the 1-year chart below:

Zacks Investment Research
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(GS) Goldman Sachs Group Inc. – Consensus Estimates Spike Upward

Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection in September 2008. This was the high water mark of the credit market turmoil. After this big fall, some counterparties suffered huge losses, which are now looking to claim.

Some investors have the capability of recovering more on the claims than what the original sellers of the claims expect. As a result, demand for buying and selling those claims has increased significantly. Furthermore, with signs of recovery, the recent market stability boosted the trading opportunities in these claims as their value increased over the last six months.

One of the first big blocks of claims was traded by Deutsche Bank (DB) in June. Deutsche traded more than €500 million in the liquidation of Lehman’s European operating company, Lehman Brothers International Europe.

Last month, hedge fund Citadel Investment Group sold a claim on $423 million of Lehman Brothers’ assets to Credit Suisse Group (CS), according to a filing at New York Bankruptcy Court.

Though cyclical headwinds and market turmoil are expected to persist for a while, we believe that the management of Morgan Stanley is staying the course to emerge from the downturn and building a strong competitive position. However, the current backdrop remains challenging, given the weak housing market and increasing unemployment.

Morgan Stanley’s second quarter results experienced continued improvement in credit default spreads and it was among the first banks to repay the bailout money. Given the continued momentum in its core institutional securities franchise and cost containment measures, we expect Morgan Stanley to deliver strong results in the near future.

Zacks Investment Research
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(MS) Morgan Stanley Sells Lehman Brothers Claim

Company Description

Goldman Sachs Group is a financial services firm offering investment banking, securities and investment management services to corporations, governments and high-net-worth individuals.

Zacks Consensus Estimates Spiking

There hasn’t been much news out of Goldman Sachs since I last reviewed the company in July. But analysts continue to be extremely bullish on the company and estimates are jumping.

The third quarter Zacks Consensus Estimate rose 8 cents in just the last 7 days to $3.49 per share. That is up from $2.57 per share 90 days ago.

The outlook for the full year has also drastically changed in the last 3 months as the full year Zacks Consensus Estimate jumped nearly 30% to $16.17 from $12.45. It is up 20 cents in just the prior 7 days as 2 out of 19 analysts raised.

The company is scheduled to report third-quarter results on Oct 14.

Will the Third Quarter Be Another Record?

On July 14, Goldman Sachs reported record revenue for the second quarter which was a result of outstanding gains in the Trading and Principal Investments business segment which jumped 93% from the year ago period.

Several of its other segments saw recovery but not to 2008 levels. Investment banking was still 15% under the year ago quarter and the mergers and acquisition segment saw revenues decline 54% year over year.

Value Fundamentals

Goldman Sachs is a Zacks #1 Rank (strong buy) stock. It has a price-to-book ratio of just 1.59. Its 5-year average return on equity (ROE) is a stellar 22.55%.

Check out the 1-year chart below:

Zacks Investment Research
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(GS) Goldman Sachs Group Inc. – Consensus Estimates Spiking

The notes will pay coupons semi-annually with the first payment expected on Mar 23, 2010. The company will use the proceeds of the debentures for general corporate purposes. Both Standard &Poor’s Ratings Services (S&P) and Fitch Ratings have assigned ‘A’ rating to the notes while Moody’s has assigned ‘A2′ rating.

Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments: Institutional Securities, Global Wealth Management Group, and Asset Management. Clients and customers include corporations, governments, financial institutions, and individuals.

Morgan Stanley reported a loss of $1.26 billion, or $1.10 per share after paying preferred dividends for the quarter ended Jun 30, 2009, compared to an income of $1.06 billion or $1.02 per share, in the prior-year quarter. The loss was mainly attributable to special charges incurred to cover losses in real estate investments and costs of repaying the bailout money to the government.

Though Morgan Stanley’s investment banking revenue was strong in the reported quarter, its conservative approach to trading hindered its ability to reap higher profits to offset the special charges. The company’s capital ratios are among the sturdiest in the industry indicating that it had pulled higher cash in reserves rather than betting on riskier assets.

We maintain our Neutral recommendation on the stock.

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(MS) Morgan Stanley Issues Senior Notes

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Aggressive Growth Equity Funds.

Three Outstanding Samples

Hartford Capital Appreciation A (ITHAX) seeks growth of capital. The fund normally invests at least 65% of total assets in common stocks of companies with market capitalization less than $2 billion.

The fund may invest in securities of foreign issuers and non-dollar securities, including emerging market securities. It has topped total returns of its benchmark index in the last 3- and 5-year periods.

Shareholders have to make minimum initial investment of $1,000 to enter this Zacks#1 Rank (“Strong Buy”) fund. It offers dividends and capital gains annually.

Pin Oak Aggressive Stock (POGSX) seeks long-term growth by concentrating investments primarily in small and medium-size companies within growth-oriented industries.

The fund generally does not base stock selections on a company’s size, but rather on assessment of a company’s fundamental prospects for growth. As of April 2009, its portfolio turnover was 38%.

Charles Schwab Corp. (SCHW), Amazon.com Inc. (AMZN) and Expedia Inc. (EXPE) are among the fund’s top holdings.

Wasatch Ultra Growth (WAMCX) was incepted in August 1992. The investment seeks long-term growth of capital, with income as a secondary objective.

The fund invests primarily in the equity securities of rapidly growing small- and medium-size companies with market capitalizations of less than $5 billion. It may invest up to 30% of total assets in securities issued by foreign companies in developed or emerging markets.

Ajay Krishnan has managed the fund since 1999. The fund has an expense ratio of 1.75%.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

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(SCHW) Top Aggressive Growth Equity Funds – Mutual Fund Commentary

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Aggressive Growth Equity Funds.

2 Solid Samples

Pin Oak Aggressive Stock (POGSX) seeks long-term growth by concentrating investments primarily in small and medium-size companies within growth-oriented industries.

The fund generally does not base stock selections on a company’s size, but rather on assessment of a company’s fundamental prospects for growth. As of April 2009, its portfolio turnover was 38%.

Charles Schwab Corp. (SCHW), Amazon.com Inc. (AMZN) and Expedia Inc. (EXPD) are among the fund’s top holdings.

Wasatch Ultra Growth (WAMCX) was incepted in August 1992. The investment seeks long-term growth of capital, with income as a secondary objective.

The fund invests primarily in the equity securities of rapidly growing small- and medium-size companies with market capitalizations of less than $5 billion. It may invest up to 30% of total assets in securities issued by foreign companies in developed or emerging markets.

Ajay Krishnan has managed the fund since 1999. The fund has an expense ratio of 1.75%.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

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(SCHW) Top Aggressive Growth Equity Funds – Mutual Fund Commentary

This fraud claim was brought against the defendants by Abu Dhabi Commercial Bank and King County in Washington State. However, U.S. District Judge Shira Scheindlin dismissed all claims brought against a fourth defendant, Bank of New York Mellon Corp. We believe this ruling could adversely affect the prospects of these credit rating agencies as it might strengthen other pending cases against them.

Recently, the rating agencies have been in the news for providing inaccurate information about some securities to certain clients. After that, the Securities & Exchange Commission (SEC), the market watchdog, criticized a rating agency for approving the application of another agency, even though the former rating agency was suspicious about the authenticity of the financial information. This whole issue is under SEC review and will give us more clarity once the SEC comes out with its findings.

In the aforementioned New York case, Morgan Stanley has been alleged for wrongfully marketing Cheyne Structured Investment Vehicle (SIV), which was declared bankrupt in August 2007, as the quality of its assets crashed. The other rating agencies are accused of giving it a high rating which ultimately misled the investors.

We believe the series of events are putting question marks on the credibility of the ratings provided by these reputed agencies, which may negatively affect their reputation and business. It is high time that the agencies took necessary measures to make their rating process much more transparent, which is very important for regaining customer confidence.

Zacks Investment Research
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(MS) Rating Agencies Face Class Action Lawsuit

The government has recorded profits of about $1.4 billion from its investment in Goldman Sachs Group Inc. (GS), $1.3 billion from Morgan Stanley (MS) and $414 million from American Express Company (AXP).

Furthermore, the government has also reaped profits in the range of $100 million to $334 million from its investments in each of the following five banks: Northern Trust Corporation (NTRS), The Bank of New York Mellon Corporation (BK), State Street Corp. (STT), US Bancorp (USB) and BB&T Corp. (BBT). It also collected about $35 million in profits from 14 smaller banks that have paid back their loans.

TARP was introduced in October 2008 to rescue the struggling banking industry, which was facing massive losses due to the sub-prime mortgage crisis and housing collapse. The payback of the bailout money by the above-mentioned banks has triggered optimism that the U.S. government may soon get out of the banking business. Earlier, taxpayers were doubtful of reaping any profits under the program, and were concerned that it could take years for the banks to repay the loans.

However, government money is still locked in some very big companies like Citigroup Inc. (C), Bank of America Corporation (BAC), insurance giant American International Group Inc. (AIG), mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE), and automakers General Motors and Chrysler. Repayment of TARP money from these companies remains uncertain.

Zacks Investment Research
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(GS) U.S. Treasury Profits from Bailed-Out Banks

With this repurchase, Northern Trust has paid a total of nearly $1.71 billion to the Treasury under TARP. This includes repurchase of preferred stock issued to the government and preferred dividends. According to the bank, the total payments represent a 14% annualized return on investment to the US taxpayers.

The $700 billion bailout program was launched by the federal government to help revive deteriorating credit markets during the height of the financial crisis. The government provided capital to institutions in exchange of preferred stock and warrants to purchase common shares.

Most banks still have short-term debt guaranteed by the government. However, some large financial firms that have redeemed warrants issued under the TARP include Morgan Stanley (MS), Bank of New York Mellon Corp. (BK), Goldman Sachs (GS), U.S. Bancorp (USB), American Express Co. (AXP), BB&T Corp. (BBT) and State Street Corp. (STT).

Although Northern Trust has been healthy with respect to its balance sheet, we think there is limited room for improving its results in the near future as the market turmoil is expected to persist for a while. The shape of its bottom line will depend on near-term economic trends.

However, repayment of TARP money will bring some relief on the preferred dividend payment front. We expect the company to emerge from this testing environment and become more competitive in the long run.

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(MS) Northern Trust Corporation Repurchases TARP Warrents

The subpoena includes investigation of documents associated with secret trading tips, where Goldman Sachs allegedly gave certain traders short-term advice that differed from its long-term research.

The investigation aims to protect investor interest by assessing the basis of verbal short-term stock tips given to the firm’s clients and whether the analysis presented was exact, meticulous and open. Galvin expressed concerns that analysts’ short-term trading tips to top clients disadvantaged some Goldman customers who may have relied on the firm’s longer-term research to make investment decisions.

The tips are also being examined by both the Financial Industry Regulatory Authority and the Securities and Exchange Commission. As of now, Goldman is the only bank under scrutiny, but there is strong likelihood of other firms being probed. Goldman is required to respond to the matter by Sept. 7.

In 2003, Galvin was one of several regulators involved in negotiating a $1.4 billion settlement with 10 big Wall Street firms, including Goldman. The firms were accused of sending out overly optimistic research in a bid to win more lucrative investment-banking business.

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(GS) Goldman Subpoenaed About Preferential Trading Tips

This move comes after Morgan Stanley reported a second-quarter loss, while its major competitors Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) reported strong earnings. After last year’s meltdown of the banking sector, Morgan Stanley steered away from risky investments that led to the demise of some of its competitors. When trading opportunities picked up in the second quarter of 2009, its competitors took advantage while Morgan Stanley lagged behind as a result of maintaining a more conservative stance to survive the financial crisis.

Morgan Stanley reported a loss of $1.26 billion, or $1.10 per share after paying preferred dividends for the second quarter, compared to $1.06 billion or $1.02 per share, in the prior-year quarter. The loss was mainly attributable to special charges incurred to cover losses in real estate investments and costs of repaying the bailout money to the government.

Though Morgan Stanley’s investment banking revenues were strong in the reported quarter, its conservative approach to trading hindered its ability to reap higher profits to offset the special charges. Furthermore, the company’s capital ratios were among the sturdiest in the industry indicating that it had pulled higher cash in reserves rather than betting on riskier assets.

In June 2009, Morgan Stanley was one of 10 major banks that was approved to repay its government loan. Morgan Stanley had received $10 billion as part of the government’s $700 billion program.

About half of the intended recruitment has already taken place across sales and trading. The company is looking to add more positions in its foreign exchange, emerging markets and equity derivatives businesses.

Morgan Stanley has already hired people from JPMorgan, Deutsche Bank AG (DB), Citigroup Inc. (C), Credit Suisse Group (CS), UBS AG (UBS) and Merrill Lynch, now part of Bank of America (BAC).  Morgan Stanley has made about 200 hires so far, some with year-end compensation guarantees.

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(MS) Morgan Stanley in Hiring Mood

Goldman had intended to seek FHC status when it first converted to a Bank Holding Company last year. The designation allows Goldman to continue to participate in non-banking financial activities, including private equity among other businesses.

A financial holding company (FHC), as stated in the Gramm-Leach-Bliley Act of 1999, is a financial entity engaged in a broad range of banking-related activities that include insurance underwriting, securities dealing and underwriting, financial and investment advisory services, merchant banking, issuing or selling securitized interests in bank-eligible assets. It can also engage in any non-banking activity authorized by the Bank Holding Company Act. The Federal Reserve Board is responsible for supervising the financial condition and activities of these companies.

Morgan Stanley (MS), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) are some of the many companies that have already acquired the status of a financial holding company.

There was some speculation that Goldman might shed its holding company status to return to an investment bank model after it repaid the Troubled Asset Relief Program (TARP) money and the Treasury Department warrants. However, now it seems that Goldman will continue to be under the supervision of the Fed for some time.

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(GS) Goldman Sachs Group Becomes Holding Company

The Exchange, a 52-storey office and retail complex also known as Dong Hai Plaza, is situated on the edge of one the main business districts in Shanghai. About 30% of the building was already rented, with the remaining portion to be sold or leased by Soho China in the coming months.

Morgan Stanley Real Estate bought The Exchange for about 2 billion yuan or $245 million in 2006 and completed construction of the building with suitable additions later. The divestment to Soho would be profitable for the company.

Morgan Stanley began investing in Shanghai properties in 2003 and undertook real-estate projects with local partners like Shanghai Forte Land and Shanghai Dragon, an investment arm of the city government. The company’s real-estate funds have a large portfolio of commercial and residential properties in Shanghai, much of it accumulated during the property boom that ended in late 2007.

Over the last decade, expansion of international companies in China has boosted office rents in big cities like Shanghai and Beijing but the global financial crisis has forced some firms to shut down offices. Though long-term prospects for the office-leasing market in Shanghai look attractive, there are more immediate challenges related to the global economy.

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(MS) Morgan Stanley Exits its Shanghai Office

Editor’s Note: With whipsaw markets like we’ve seen over the past couple of days, we thought an explanation from our esteemed colleague Martin Hutchinson at Money Morning might be in order. An expert on international finance, he guides us through the back rooms of institutional high frequency trading, why it’s affecting the markets, and what we can do about it…

Goldman Sachs Group Inc. (NYSE: GS) disclosed recently that it had 46 “$100 million trading days” in the second quarter of 2009. That was a record number, even for one of the biggest players on Wall Street.

When the U.S. economy is facing collapse and merger and acquisition volume is way down, it seems odd that investment banks like Goldman had record quarters.

Well, here’s the secret: They’ve found a new way to skim more of the cream off the top of U.S. economic activity. It’s called “High Frequency Trading.”

High frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Human owners of the supercomputers program them to take advantage of information milliseconds faster than other computers, and whole seconds faster than ordinary human traders. This is not a minor development; high frequency trading now represent about 70% of the trading volume in the U.S. equity market.

High frequency trading computer servers are able to beat other computers because they are located at the exchanges. They take crucial advantage of the finite speed of light and switching systems to front-run the market. They also gain information on orders and market movements more quickly than the market as a whole. They operate not only on the New York Stock Exchange (NYSE), but also on the electronic trading exchanges such as the NYSE hybrid market.

Predatory High Frequency Trading Tricks Revealed

According to a paper “Toxic equity trading order flow on Wall Street” by the brokerage Themis Trading LLC, there are a number of different types of high frequency trading:

• Liquidity rebate traders take advantage of volume rebates of about 0.25 cents per share offered by exchanges to brokers who post orders, providing liquidity to the market. When they spot a large order they fill parts of it, then re-offer the shares at the same price, collecting the exchange fee for providing liquidity to the market.
• Predatory algorithmic traders take advantage of the institutional computers that chop up large orders into many small ones. They make the institutional trader that wants to buy bid up the price of shares by fooling its computer, placing small buy orders that they withdraw. Eventually the “predatory algo” shorts the stock at the higher price it has reached, making the institution pay up for its shares.
• Automated market makers “ping” stocks to identify large reserve book orders by issuing an order very quickly, then withdrawing it. By doing this, they obtain information on a large buyer’s limits. They use this to buy shares elsewhere and on-sell them to the institution.
• Program traders buy large numbers of stocks at the same time to fool institutional computers into triggering large orders. By doing this, they trigger sharp market moves.
• Finally, flash traders expose an order to only one exchange. They execute it only if it can be carried out on that exchange without going through the “best price” procedure intended to give sellers on all exchanges a chance at best price execution. The Securities and Exchange Commission (SEC) has now promised to ban this technique, and flash trading on the Nasdaq will stop on September 1.

This toxic trading has caused volume to explode, especially in NYSE listed stocks. The number of quote changes has also exploded and short-term volatility has shot up. NYSE specialists now account for only around 25% of trading volume, instead of 80% as in the past.

The bottom line for us ordinary market participants is that insiders are using computers to game the system, extracting billions of dollars from the rest of the market. While it is illegal to trade on insider knowledge about company financials, these people are trading on insider knowledge about market order flow. That’s how Goldman Sachs and the other biggest houses make so much from trading. By doing so they are rent seeking, not providing value to the market.

Two Ways The SEC Can Stop High Frequency Trading

There are two ways to stop high frequency trading – ideally the SEC will employ both.

• First, they can introduce a rule that all orders must be exposed for a full second. That will reduce the volume of high frequency trading, but still doesn’t truly protect non-computerized outsiders.
• The second, and better, solution is to introduce a small “Tobin tax” on all share transactions. It could be tiny; maybe 0.1 cents per share. (The SEC would also need to ban “exchange rebates” to traders.) Such a tax would make the worst high frequency trading types unprofitable without imposing significant costs on retail investors. It would also provide funds to help run the vast apparatus of regulation and control that seems to be necessary to run a modern financial system.

Goldman Sachs, and other financial institutions of its ilk, have imposed huge costs on the U.S. public with their “too big to fail” status. Now they are adding to the problem by scooping out money from the stock market through high frequency trading.

It’s about time the government imposed some taxes to stop the worst of these scams and recover the public some of its money.

Good investing,

Martin Hutchinson

View original at: Investment Advice and Investment Research with a Contrarian Point of View

(GS) High Frequency Trading: How This Toxic Trading Affects Investors

The financial sector has led the market rally the last few days – and, as a student of history, that should give you pause.

We’ll get into that in a moment, but first… why are financials making such a solid run?

Short answer: Surprisingly good earnings. So good, in fact, that Goldman Sachs (NYSE: GS) just set a record for their best quarter ever – so good that they can afford to set aside over $11 billion for compensation alone.

Both Citigroup (NYSE: C) and Bank of America (NYSE: BAC) also beat estimates, pulling in billions last quarter, less than a year after getting bailed out with TARP funds.

But don’t let that fool you. Goldman Sachs, for one, has already paid back their TARP loan, with interest – over 22% annualized interest, in fact. The government made loan-shark money on at least this corner of the TARP bailout.

So, when we see Bank of America shares gain almost 10% in a week, why aren’t we thrilled? When Morgan Stanley posts a 5% gain over the same time, shouldn’t we be ecstatic?

No.

Four Warning Signs for Bank Earnings

There’re a few reasons for skepticism…

First, the earnings are largely illusory. Bank of America comes right out and says it – there were a number of one-off profits in the numbers, and the second half of the year should be much more difficult.

Second, the earnings aren’t signs of true recovery. They aren’t based on solid economic recoveries… but rather on yet more speculation, and the fees therein.

In other words, the banks are getting a nice cut of money that’s being moved around… but nothing of value is being produced. And little of value is being sold – these banks still aren’t making loans to most homebuyers or small businesses.

Third, with so much of the competition now bankrupt and out of business, these companies should be doing even better. Think about it – Bear Stearns, Lehman, CIT, countless others are all gone. The banks left standing ought to be doing much better, as more business comes their way.

But the real reason this ‘recovery’ has us worried? Simply put, the sector that led you into a bear market is never the one that leads you out. As long as financials are leading the way, you should be extremely wary of this latest rally.

The Charts Agree

The technical indicators support this. On July 14 – right around the time financials took the lead in the current rally – the S&P 500 crossed above both its 20-day and 50-day moving average, into overbought territory.

It’s stayed there ever since, with some of its most overbought days coming in the past week. Meanwhile, volume has been declining ever since March kicked off this latest rally.

So, what’s all this mean? Basically, sometime soon, we’re due for a fall. We could be seeing the start of that this week.

Just Because The Markets Fall, Doesn’t Mean You Have To

I would consider buying some October puts on some of the financials – especially Bank of America (NYSE: BAC), which has had the biggest run-up, on some of the weaker numbers.

I’d also take a small position in the ProShares Ultrashort S&P 500 (NYSE: SDS) in anticipation of this fall.

To be clear, it’s impossible to know exactly when things will turn down (or up, for that matter).

It’s also impossible to know how low (or high) any trend will run.

The one thing we can know, though, is this rally is near its top, and losing steam fast. Getting in position to make some money as the market falls just makes good sense.

Good investing,

Ryan Cole

View original at: Investment Advice and Investment Research with a Contrarian Point of View

($GS) Why Financial Earnings Leaders Means Bad Times Ahead

Company Description

Goldman Sachs Group is a financial services firm offering investment banking, securities and investment management services to corporations, governments and high-net-worth individuals.

Goldman Saw Record Quarterly Revenue

On July 14, Goldman Sachs reported second-quarter 2009 results which easily surprised on Wall Street estimates by 40.06%, or $1.41 per share. Earnings per share were $4.93 compared to analysts’ estimates of $3.52.

The record revenue was a result of a surge in the Trading and Principal Investments segment which saw revenue 93% higher than the second quarter of 2008 and 51% higher than the first quarter of the year. Revenue in FICC and the Equities segment were also higher than a year ago with Equities climbing 28% over the second quarter of 2008.

Investment banking appears to be on the road to recovery with quarter after quarter revenue rebounding by 75% but it still lagged the second quarter of 2008 by 15%. Financial Advisory segment, which handles mergers and acquisitions, saw revenue fall 54% compared to a year ago as fewer deals are being completed.

As the stock market fell in 2008 and 2009, the Asset Management segment was pressured, falling 28% compared to a year ago.

During the second quarter of 2009, assets under management increased $48 billion due mainly to market appreciation as the stock and fixed income markets rebounded. However, there was also new money coming in, with $6 billion of the $48 billion coming from net inflows.

The number of employees fell 1% during the quarter as the company put aside $6.65 billion in compensation and benefits expenses which included salaries and estimated year-end discretionary bonuses as well as severance costs and payroll taxes.

Consensus Estimates Move Sharply Higher

Given the much-better-than expected second quarter earnings report, covering analysts scrambled to raise estimates on the third quarter and the full year.

Third quarter consensus estimates leaped 11.72% in the last week with 12 out of 18 covering analysts raising to an average of $3.24 from $2.90 per share.

Full year consensus estimates surged 17.37% to $15.47 from $13.18 in the last 7 days with 14 out of 19 covering analysts raising.

Analysts now expect year over year earnings growth of 246.01%, which reflects the turnaround in the fortunes of the financial sector since 2008.

Value Fundamentals

Goldman Sachs is a Zacks #1 Rank (strong buy) stock. It has a price-to-book of 1.54. The company has a stellar 5-year average return on equity (ROE) of 22.58%.

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($GS) Goldman Sachs Group Inc. – Saw Record Quarterly Revenue

Even as Goldman Sachs (NYSE: GS) reported the best quarterly profit in it’s 140-year history, and JPMorgan Chase & Co (NYSE: JPM) announced that it’s profit climbed 36 percent to $2.7 billion, the news coming from another former financial stalwart is strikingly different.

CIT Group (NYSE: CIT) is rumored to be close to bankruptcy talks and its shares took a dive this morning as the United States government said it wouldn’t rescue it a second time.

That’s pretty clear language that “firms not vital to the inner workings of the financial system” would not be saved like many larger banks have been. It’s harsh and it’s ugly, and it’s called capitalism.

But it’s unclear what the total national economic impact will be from these smaller collapses.

CIT did a large amount of business with small and medium sized commercial loans, so it will be interesting to see what kind of impact this will have on the already tenuous commercial real estate sector.

Shares have plummeted over 78% today as the likelihood for a bankruptcy becomes greater – It would be the biggest since Lehman Brothers went under.

But is it a forgone conclusion right now, like a ball pushed too far over the cliff? Once rumors of Lehman’s bankruptcy were out, customers rushed to pull out money an move business across the street. This had the immediate effect of hastening the fall, becoming a self-fulfilling prophecy.

Is the same momentum at work here? Has the market already made its decision? We’ll know soon enough.

View original at: Investment Advice and Investment Research with a Contrarian Point of View

(GS) CIT Goes Over a Cliff

Company Description

SEI Investments Company provides asset management processing and investment operations software solutions to institutional and personal wealth management firms. The firm was founded in 1968 and has market cap of $3.25 billion.

First-Quarter Results

SEU has struggled in the weak economy of the last year, but the company was still able to beat analyst estimates on AR 23 when reporting its first-quarter results.

Revenue was down from the same period last year, but when removing one-time items, earnings came in at 23 cents per share, 1 penny ahead of the consensus.

One-Time Charges Clip Income

SEI noted that its income was effected due to a one-time charge of $14.4 million related to defaults in a structured investment vehicle.

Strong Growth Projection

In spite of the challenging environment and tough quarter, estimates are up, with the current-year climbing 4 cents in the last 60 days to $88 cents.

The next-year estimate is bullish, pegged at $1.09, a 23% earnings growth projection.

Income

SEI has carries a solid growth projection from the analyst community, but the company also pays a 1% dividend, adding a bit of cushion to the bottom line.

Zacks Investment Research
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(SEIC) SEI Investments Co. – Growth And Income – Zacks Rank Buy

Company Description

TD AMERITRADE provides self-directed investors with brokerage services through its subsidiaries. The company offers products for all types of traders and investors as well as a national branch system and an expansive network of independent investment advisors.

Great Quarter

On Apr 21 the broker reported great second-quarter results for fiscal 2009 that included trading levels near a record high. Average client trades per day was roughly 325,000, up 8%. Investors who have been on the sideline for a long period of time have rushed back in fear of missing the run up. Is it good timing? That remains to be seen.

Regardless, net income came in at $132 million, or 23 cents per share, meeting analysts’ expectations for the second consecutive quarter.

Buy Back Complete

During the second quarter TD AMERITRADE completed its repurchase program. Approximately 36 million shares were bought at an average price of $11.88.

Analyst Upgrades

The company also reaffirmed its full-year guidance of earnings between $0.90 and $1.15. Following the previously mentioned release the consensus estimate rose 8 cents, to $1.06, in the upper third of the company’s guidance.

Forecasts for next year are averaging $1.24, which is up 11 cents over the past 3 months. While the projections are calling for a 20% contraction this year, the company should grow 17% next year.

Aqcuisition Complete

Earlier this month TD AMERITRADE announced that the deal to purchase thinkorswim, a growing online broker and educator that specializes in options. The combination of cash and stock is valued at just over $600 million.

The Chart

AMTD has had very consistent earnings results over the past 5 years, with just 2 misses. One of the misses came in the midst of the greatest financial crisis most have ever seen. Take a look below.

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(AMTD) TD AMERITRADE Holdings Corp. – Aggressive Growth – Zacks Rank Buy

Almost four months ago we discussed E*Trade Financial (Nasdaq: ETFC) and it’s forgotten brokerage profit center. In the month afterwards to April 17, E*Trade climbed an impressive 248%.

That price has fallen by almost 50% since – and it’s just one of the reasons why we’re looking at E*Trade again. The larger basis behind our attention to ETFC is the short interest.

In March the short interest was 13% with 70 million shares being shorted. Currently it stands at 16% with over 90 million shares shorted.

Ultimately, E*Trade’s issues come back to the amount of non-performing mortgage debt it has on its balance sheets, how much it can refinance and how those losses will affect the rest of its income.

In the meantime, they’ve been raising capital and issuing new stock.

Until Wall Street feels comfortable with these items, they’ll be cautious. That means smaller investors have the ability to take advantage of this emotional seesaw and profit from E*Trade’s gyrations.

Who knows if we’ll see another 250% gain. But if the stock price moves back to its April highs, it would represent a 100% gain from today’s price of $1.25. Not bad by any stretch for a short-term gain.

View original at: Investment Advice and Investment Research with a Contrarian Point of View

(ETFC) E*Trade Attractive Again?

Company Description

Goldman Sachs in an investment bank that specializes in providing investment services like investment banking and money management. The company was founded in 1869 and has a market cap of $74 billion.

First-Quarter Results

Goldman’s share price has been in rally mode for most of the last 7 months after bottoming out last November during the height of the financial crisis. The company’s much better than expected first quarter results, reported on May 15, have given shares an extra boost.

Revenue was down from last year, coming in at $11.88 billion. Income however was actually up from last year, improving to $3.39 per share, far ahead of the consensus of $1.64.

Spreads Drive Trading Results

Goldman’s results were helped by excellent results from its credit trading division, which benefited from unusually large spreads due to the market volatility.

Estimates Surge

With renewed optimism running through the economy and the financial sector, analyst have become very bullish on Goldman. The next-year estimate is surging, jumping to $11.51 per share from just $7.72 60 days ago. The next-year estimate is pegged at $13.11, a 14% earnings growth projection.

Valuations

In spite of the big run-up in the company’s share price, it still looks reasonably valued due to higher estimates. Based upon the current-year estimate, this stock has a P/E multiple of just over 12X, in line with the overall market.

The Chart

As previously mentioned, shares of GS have been locked into a nice rally for the last 7 months, having received a nice boost in the last 3 months from a stronger overall market. Take a look at the nice run below.

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(GS) Goldman Sachs Group, Inc. – Momentum – Zacks Rank Buy

The Federal Deficit will be almost $2 Trillion this year, or over 12% of GDP. If we exclude the WWII years, the previous peak in the deficit as a percent of GDP was 6.3% under Reagan. Next year, the deficit is projected to decline to about $1.2 Trillion, a projection that strikes me as optimistic, but even if achieved will still be a greater share of GDP than during the worst fiscal excesses of the Reagan years.

Much of the deficit this year is unavoidable, as it comes from shrinking revenues as much as from higher spending. With profits down, corporate income taxes are down; with people unemployed, or having their salaries or hours cut, they pay less individual income taxes. And you can just guess what the worst bear market since the Great Depression has done to capital gains taxes.

The stimulus spending was needed to get the economy back on track (along with a very aggressive Fed). Without it, there would be little hope of breaking the vicious cycle dragging the economy down, and with it future tax revenues. However, a huge amount of spending has been directed at the financial sector. While there is some hope that these “investments” will not be a total loss, few expect the $700 in TARP money to actually turn a profit. We will be lucky if we end up getting $500 billion of it back. There have also been huge hidden subsidies to the financial sector in the form of loan guarantees, etc.

Even under the rosy scenario of Obama’s budget, the Federal debt will balloon from 40.8% of GDP in 2008 to 65.8% in 2013. This will put a huge burden on our children and grandchildren as they will have to face either higher taxes or lower government services (or both).

Cutting spending or significantly raising taxes at this point would be a huge mistake, and even 2011 may be too soon to do so. After all, when FDR pulled back from the New Deal in 1937, the economy promptly fell back into a nasty recession — in distinct contrast to his first term, which saw some of the fastest growth in GDP and Industrial Production in U.S. history (obviously coming off a very low base).

The debt overhang we are working off now is much larger relative to the economy than what we had in the late 1920’s, so the scale of the problem is similar to that of the Depression. The biggest difference is that we acted promptly this time around, rather than dithering for years and years. Still, at some point we are going to have to raise more revenue.

The options for cutting spending significantly are limited outside of health care (and then only if an optional public plan is part of the reform, voluntary efforts by the Health Care industry will not do the job and should not really be taken seriously). Cut back military spending? In case you have not noticed, we are still fighting two wars. Cut back spending on things like the national Institutes of Health and the Center for Disease control in the face of a possible pandemic? Cut back on infrastructure spending when our bridges are literally falling down, and we need to put people to work?

While I would love to see us cut back on agricultural subsidies, half of the U.S. Senate is elected by 15% of the population, and that 15% includes lots of farmers and those dependent of the farm economy, so this is not going to happen. Cutting Veterans benefits hardly seems to be an honorable thing to do to those who have sacrificed in Iraq and Afghanistan, and should be off the table regardless of how you feel about the wisdom of being involved with those wars.

Eliminate earmarks? Perhaps on procedural grounds it would be wise, but from a budgetary standpoint that was complete campaign nonsense last year. The simply do not add up to that much in the context of the overall budget. Cutting revenue sharing with the States when they are generally in worse fiscal shape than the Federal government (with the largest state being the poster boy for state fiscal problems) does not seem to be a very good answer either.

Unless you want to not pay the interest on the federal debt, or want to drastically cut Social Security and Medicare benefits, there is not that much available to cut on the spending side. Besides, Social Security has been subsidizing the rest of the government for the last quarter century, and cutting benefits now that those loans to the general fund have to be repayed would be the ultimate bait and switch.

One way or another, a big part of the solution is going to have to come on the revenue side. Given the huge inequality of wealth and income in this country (huge relative to our OECD peers, based on the Gini Coefficient, we are closer to Cameroon than Canada in terms of income inequality) we need to avoid putting too much on the backs of the working class. Here is what I would suggest:

Today, the NYSE will probably trade about 5 billion shares. The average price of a S&P 500 stock is about $33. Thus, on the NYSE alone, $165 billion is changing hands in a single day. If there were a transaction fee of 0.1% on that, it would raise $165 million a day, or with about 250 trading days a year, about $41.25 billion per year. If similar fees were levied at the Nasdaq and on options, the total could reach the vicinity of $100 billion. That is not enough to close the fiscal gap, but not exactly chopped liver either.

Long-term investors would hardly notice the tax, but speculating day traders would quickly start to feel the bite. Encouraging people to take a long-term view and actually invest — rather than engage in pure speculation in little pieces of paper that just happen to represent real companies — would be a good thing, in my view.

The tax would fall on the Financial sector, and would be a way that that sector ends up repaying the lavish subsidies that it has recently received. Since wealth is even more unequally distributed in this country than is income — and the wealthy hold much more of their wealth in equities than do the middle class — the tax would be highly progressive. In effect, the tax would be like a slightly higher commission charge.

This, at the margin, might hurt firms that do a lot of trading particularly for their own account, like Goldman Sachs (GS). For firms that trade mostly for their clients like E-Trade (ETFC) and Charles Schwab (SCHW), I suspect that the fee would be passed along to the customer, especially since it could not be avoided by moving your account to another broker.

As long as the rate was kept low, it would be a very painless tax for all involved. The danger would be that it was too effective, and that the rate would rise over time and trading activity would move offshore. However, at the 0.1% level, I do not see that as a significant danger. Somehow we managed to have a working financial system even before May Day (5/1/75, when fixed commissions ended), when it was not uncommon for transaction fees to be over 3% of the transaction value.

Current transaction fees are almost zero; somehow I don’t see how a minor increase would kill the markets. On the other hand, not bringing the fiscal deficit under control in the medium to long term, could kill not just the markets, but the entire economy.

Zacks Investment Research
View original at: Zacks.com News Feed

(GS) A Modest Proposal – Analyst Blog

Company Description

Thinkorswim provides online brokerage and investor education financial products for self-directed investors and active traders.

The online brokerage segment offers several trading platforms that execute trades in stocks and stock options, index options, futures and futures options, forex, mutual funds and fixed income. Customers include self-directed investors, institutional traders and money managers.

The Investools’ Education Group offers a wide range of education products and services that coordinate with the online brokerage platforms.

Record Third Quarter Results

On Oct 30, thinkorswim Group announced third-quarter earnings that beat Wall Street estimates by 38.10%, or 8 cents a share. Net income rose to $19.6 million from $18.4 million in the third quarter of 2007. Earnings were a record at 29 cents per share compared to 27 cents a year ago.

Revenue surged 10% to a record $98.1 million from $89.3 million in the same period a year ago. 58% of revenue was from the brokerage segment.

Customer assets hit a new record of $3.1 billion with $1.74 billion in client cash and money market funds. Total accounts rose 97% from the year ago quarter and average retail trades per day jumped 94% to 57,300 from third-quarter 2007.

The Investools’ Education segment didn’t fare as well. Graduates fell 20% to 7,620.

Consensus Estimates Rise for the Full Year

Covering analysts are bullish about thinkorswim with 2 out of 4 analysts raising full-year estimates in the last 30 days. 2008 full-year consensus estimates rose 23% to 97 cents from 79 cents in the last 60 days.

Value Fundamentals

Thinkorswim is a Zacks #1 Rank (strong buy) stock. It has surprised on estimates 3 out of 4 quarters by an average of 20.89%.

SWIM is trading at only 7.9x forward earnings. Its price-to-book is 1.83. The company has a stellar 1-year return on equity (ROE) of 36.06%.

Content Courtesy: Zacks Investment Research

#1 Ranked Stocks Highlight Archive
To truly take advantage of the Zacks Rank, you need to first understand how it works. That is why we created the free special report: Zacks Rank Guide: Harnessing the Power of Earnings Estimate Revisions.

(SWIM) Thinkorswim Group Inc – Consensus Estimates Rise for the Full Year

Source: Cartoonbank.com

Compiling this round-up, I invariable thought of John Crudele’s (New York Post) comment: “… I’m as sick of writing about financial problems as you are of reading about them. But, as your mother probably said, just sit still and take the medicine. It’s good for you.”

Governments around the globe launched unprecedented and concerted rescue operations for major banks in order to unfreeze short-term credit markets and avoid a collapse of the world’s financial system. It has also been announced, according to The New York Times, that President Bush had agreed to play host to a summit of world leaders soon to discuss the global response to the financial crisis.

Reflecting on the origins and fall-out of the credit debacle, a quote from Winston Churchill comes to mind: “The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.”

Throughout the week, investors remained preoccupied with concerns about the intensifying economic damage that inevitably follows financial damage. Deleveraging of hedge funds continued unabated, and commodities and emerging-market stocks, bonds and currencies plunged on the back of risk aversion.

On a positive note, credit markets saw signs of improvement, with the overnight dollar Libor rate dropping to 1.66% from 5.09% last week, commercial paper rates falling to 1.05% from 3.50%, and the Ted spread – the difference between what banks charge each other for three-month loans (three-month dollar Libor) and what the Treasury pays (three-month Treasury Bills) – narrowing by 100 basis points to 3.63%.

“By the time the Ted spread is safely beneath 100 basis points once again, I expect the next bull market in equities to be well under way. The global economy should be recovering as well,” added David Fuller (Fullermoney) from across the pond.

Source: Stockcube Research

Next, a tag cloud of the text of the dozens of articles I have devoured during the past week. This is a way of visualizing word frequencies at a glance. Not too many surprises here, especially seeing “banks” featuring so prominently.

Warren Buffett, in an Op-Ed article in The New York Times, said that he was buying American stocks for his personal portfolio and encouraged others to do the same. “I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over,” said Buffett.

Jeremy Grantham (GMO) summarized his investment recommendations in his latest quarterly newsletter as follows: “At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”

I am of the opinion that stock markets are in a broad phase of bottoming out. In a post a few days ago I asked the question “Is the financial storm over?”, concluding: “One could argue that stock prices are oversold, creating the potential for a further advance through year end, especially if credit spreads tighten (i.e. normalize) further. However, stock market valuations are not at the same oversold level as prices, arguing that a secular low may not necessarily have been reached. The third-quarter earnings season should provide part of the puzzle.”

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy
“Global business confidence plunged last week to a record low. The financial panic has unnerved businesses, particularly in the US and Europe, but sentiment has also turned sharply lower in South America and even in Asia,” according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com. “The global economy is taking a body blow from the financial turmoil.”

Economic reports released in the US during the past week consisted of a battery of worrisome updates. Fed Chairman Ben Bernanke’s depiction of the outlook for the economy in his address to the Economic Club of New York on Wednesday best described what was in store for the economy.

“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market.

“Credit markets will take some time to unfreeze. And with the economies of our trading partners slowing, our export sales, which have been a source of strength, very probably will slow as well.

“These restraining influences on economic activity, however, will be offset somewhat by the favorable effects of lower prices for oil and other commodities on household purchasing power. Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.”

BCA Research commented on the economic situation as follows: “The combination of a deteriorating economic outlook and continued severe financial stress points to an early cut in the Fed funds rate to 1%. The recently released Beige Book provided further confirmation that economic activity is weakening across the country, and there is little doubt that a deep rather than mild recession is unfolding. A zero funds rate within the next few months is possible if financial conditions do not soon improve.”

To which Frank Holmes (US Global Investors) added: “The Treasury and its counterparts in the G-7 have started the monetary process by dropping interest rates and increasing the money supply, and that has started the healing process. Now we need the government to have a fiscal plan to create sustainable jobs rather than one-time ‘stimulus’ checks that get spent on consumer goods. We advocate no new taxes and cuts for wasteful spending, and that the government dedicate itself to infrastructure projects that will create new jobs and repair the nation’s roads, bridges and other critical facilities.”

Elsewhere in the world, economic data also showed an acceleration in the weakening of activity.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, October 17, 2008.

In addition to Fed Chairman Ben Bernanke testifying at the House Budget Committee on Monday, October 20, next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Leading Indicators (October 20): Interest rate spread, vendor deliveries, consumer expectations and money supply are the components likely to make a positive contribution in September. Stock prices, manufacturing workweek, initial jobless claims, and building permits are expected to make negative contributions. Forecasts of money supply and orders of consumer durables and non-defence capital goods are used in the initial estimate. The net impact is a 1.0% drop in the leading index during September after a 0.5% drop in August. Consensus: -0.2%.

2. Existing Home Sales (October 24): Sales of existing homes are most likely to have declined to an annual rate of 4.80 million units in September. Consensus: 4.92 million versus 4.91 million in August.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, the direction of the US dollar.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, October 17, 2008.

Equities
Although very volatile, developed stock markets closed the week with fairly good gains – largely as a result of Monday’s record surge – as shown by the MSCI World Index improving by 4.4% after the previous week’s record decline of 20.1%. This was the first positive week since the second week of September. Leading the pack were Italy (+6.7%), Canada (+5.5%), Germany (+5.2%) and Japan (+5.0%)

On the other hand, risk-averse investors caused the MSCI Emerging Markets Index (-4.1%) to stumble further after losing 20.2% the week before. The week’s largest decline was recorded by the Russian Trading System Index, giving up 21.0% to bring its total decline since the Index’s high of May 18, 2008 to 68.2%.

The performance of the Dow Jones World Index (green line) and the MSCI Emerging Markets Index over the past two weeks are shown in the graph below.

The US stock markets all improved over the week as shown by the major index movements: Dow Jones Industrial Index +4.7% (YTD -33.3%), S&P 500 Index +4.6% (YTD -35.9%), Nasdaq Composite Index +3.7% (YTD -35.5%) and Russell 2000 Index +0.8% (YTD 31.3%).

The Dow needs to rise to 10,141 – 14.6% higher than its current level of 8,852 – in order to be officially classified as being in a bull market again. The Index will be required to increase by 22.1% to reach its 50-day moving average and 34.3% to get to the key 200-day line.

Click here or on the thumbnail below for a (predominantly green) market map, obtained from Finviz.com, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.

The investment bank & brokerage group (+28%) was the best-performing group during the past week. Goldman Sachs (GS) and Morgan Stanley (MS) were up on news that the government would provide funding to the two companies as part of a broader effort to restore confidence in the stressed financial system.

The automobile manufacturer group (+26%) was the second-best performer. According to media reports, General Motors (GM) is negotiating a possible merger with privately owned Chrysler.

Five of the ten worst-performing groups last week were related to the commercial real estate market. The worst-performing group was the real estate services group which plunged by 32%. Four real estate investment trust groups were also among the underperformers, showing investors’ concerns about a weakening commercial real estate market brought on by the credit crunch.

The US stock market is in the middle of the Q3 earnings reporting season. According to Bespoke, 159 companies covered by analysts have so far reported their quarterly numbers, of which 60% have beaten estimates, 32% have missed and 8% have reported as expected.

Fixed-interest instruments
As mentioned in the introductory paragraphs, interbank and commercial lending rates started to ease during the past week. The overnight Libor rate dropped to 1.66% on Friday from a high of 6.87% on September 30.

However, at the long and risky end of the credit market the situation was less encouraging, with the spread between the yield on junk bonds and the ten-year Treasury Note yield at 14.51% on October 16, which is higher than the spread of 14.23% on October 10.

Also, credit default swaps (CDS) for emerging markets – notably Hungary, Ukraine and Russia – widened considerably amid concerns about the health of their banking systems.

Movements in government bonds yields were as follows: the ten-year US Treasury Note increased by 7 basis points to 3.95%, the UK ten-year Gilt yield climbed by 20 basis points to 4.67% and the German ten-year Bund rose by 4 basis points to 4.04%. Emerging-market bonds suffered as investors shunned risky assets.

US mortgage rates increased, with the 30-year fixed rate rising by 36 basis points to 6.45% and the 5-year ARM by 5 basis points to 6.01%.

Currencies
The major currencies experienced a relatively quiet week as plans to implement unlimited US dollar currency swaps between the Federal Reserve and other major central banks brought some stability.

Although not a long-term bull on the greenback, Bill King (The King Report) highlighted that the “greatest short squeeze of all time” was occurring in the US dollar, and yen to a lesser degree. “Virtually all US private and public sector debt is a dollar short. The other big short is the yen via the ‘carry trade’,” said King.

Over the week the US dollar gained against the Japanese yen (+1.0%) and Canadian dollar (+1.2%), but lost against the euro (-0.1%), the British pound (-1.4%) and the Swiss Franc (-0.1%).

The announcement of coordinated plans by Australia and New Zealand to safeguard their banking systems resulted in a rebound of their currencies, with the Australian dollar and New Zealand dollar gaining 7.3% and 3.9% respectively against their US namesake.

Emerging-market currencies, especially those with large current account deficits, lost heavily as global recession risks increased. Examples of losses against the greenback include the Hungarian forint (-5.7%), the South African rand (-7.1%), the Turkish lira (-6.4%) and the Korean won (-8.4%).

Commodities
Fears that the deteriorating global economic situation was causing demand destruction resulted in strong selling pressure for all commodities. The Reuters/Jeffries CRB Index dropped by 11.2% during the week, resulting in a loss of 39.7% since its high of July 2, 2008.

The chart below shows the relationship between the CRB Index and the Baltic Dry Index – an index covering dry bulk shipping rates and seen as a rough proxy for global growth.

West Texas Intermediate crude prices on Thursday fell below $70 a barrel for the first time since August 2007, but recovered to $72.13 on Friday to bring the decline since the record high of mid-July to more than 50%. This prompted OPEC, the oil-exporting countries’ cartel, to schedule an emergency meeting for Friday, October 24 to discuss production cuts.

Notwithstanding steep declines in oil and gold prices, Merrill Lynch analysts, according to MarketWatch, said gold prices could hit $1,500 as global plans to rescue the financial industry are set to increase inflation pressures. The analysts didn’t say when gold would hit the price target. They also predicted oil prices will rise to $150 a barrel.”

The following graph shows the past week’s severe declines for various commodities:

Now for a few news items and some words and charts from the investment wise that will hopefully assist in guiding our investment portfolios through these troubled times. And remember the quote from Charles Dow: “Exercise enough patience for six men.”

That’s the way it looks from Cape Town.

Source: Slate

PBS: Bill Moyers talks with comedian Jon Stewart
“Bill Moyers talks with comedian Jon Stewart, host of Comedy Central’s The Daily Show, about how faking the news can reveal more of the truth than all of the Sunday-morning talk shows put together.”

Source: PBS, Bill Moyers Journal, October 17, 2008.

(more…)

View original at: Investment Postcards from Cape Town

(GS) Words from the (investment) wise for the week that was (October 13 – 19, 2008)

Source: Cartoonbank.com

Compiling this round-up, I invariable thought of John Crudele’s (New York Post) comment: “… I’m as sick of writing about financial problems as you are of reading about them. But, as your mother probably said, just sit still and take the medicine. It’s good for you.”

Governments around the globe launched unprecedented and concerted rescue operations for major banks in order to unfreeze short-term credit markets and avoid a collapse of the world’s financial system. It has also been announced, according to The New York Times, that President Bush had agreed to play host to a summit of world leaders soon to discuss the global response to the financial crisis.

Reflecting on the origins and fall-out of the credit debacle, a quote from Winston Churchill comes to mind: “The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.”

Throughout the week, investors remained preoccupied with concerns about the intensifying economic damage that inevitably follows financial damage. Deleveraging of hedge funds continued unabated, and commodities and emerging-market stocks, bonds and currencies plunged on the back of risk aversion.

On a positive note, credit markets saw signs of improvement, with the overnight dollar Libor rate dropping to 1.66% from 5.09% last week, commercial paper rates falling to 1.05% from 3.50%, and the Ted spread – the difference between what banks charge each other for three-month loans (three-month dollar Libor) and what the Treasury pays (three-month Treasury Bills) – narrowing by 100 basis points to 3.63%.

“By the time the Ted spread is safely beneath 100 basis points once again, I expect the next bull market in equities to be well under way. The global economy should be recovering as well,” added David Fuller (Fullermoney) from across the pond.

Source: Stockcube Research

Next, a tag cloud of the text of the dozens of articles I have devoured during the past week. This is a way of visualizing word frequencies at a glance. Not too many surprises here, especially seeing “banks” featuring so prominently.

Warren Buffett, in an Op-Ed article in The New York Times, said that he was buying American stocks for his personal portfolio and encouraged others to do the same. “I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over,” said Buffett.

Jeremy Grantham (GMO) summarized his investment recommendations in his latest quarterly newsletter as follows: “At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”

I am of the opinion that stock markets are in a broad phase of bottoming out. In a post a few days ago I asked the question “Is the financial storm over?”, concluding: “One could argue that stock prices are oversold, creating the potential for a further advance through year end, especially if credit spreads tighten (i.e. normalize) further. However, stock market valuations are not at the same oversold level as prices, arguing that a secular low may not necessarily have been reached. The third-quarter earnings season should provide part of the puzzle.”

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy
“Global business confidence plunged last week to a record low. The financial panic has unnerved businesses, particularly in the US and Europe, but sentiment has also turned sharply lower in South America and even in Asia,” according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com. “The global economy is taking a body blow from the financial turmoil.”

Economic reports released in the US during the past week consisted of a battery of worrisome updates. Fed Chairman Ben Bernanke’s depiction of the outlook for the economy in his address to the Economic Club of New York on Wednesday best described what was in store for the economy.

“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market.

“Credit markets will take some time to unfreeze. And with the economies of our trading partners slowing, our export sales, which have been a source of strength, very probably will slow as well.

“These restraining influences on economic activity, however, will be offset somewhat by the favorable effects of lower prices for oil and other commodities on household purchasing power. Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.”

BCA Research commented on the economic situation as follows: “The combination of a deteriorating economic outlook and continued severe financial stress points to an early cut in the Fed funds rate to 1%. The recently released Beige Book provided further confirmation that economic activity is weakening across the country, and there is little doubt that a deep rather than mild recession is unfolding. A zero funds rate within the next few months is possible if financial conditions do not soon improve.”

To which Frank Holmes (US Global Investors) added: “The Treasury and its counterparts in the G-7 have started the monetary process by dropping interest rates and increasing the money supply, and that has started the healing process. Now we need the government to have a fiscal plan to create sustainable jobs rather than one-time ‘stimulus’ checks that get spent on consumer goods. We advocate no new taxes and cuts for wasteful spending, and that the government dedicate itself to infrastructure projects that will create new jobs and repair the nation’s roads, bridges and other critical facilities.”

Elsewhere in the world, economic data also showed an acceleration in the weakening of activity.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, October 17, 2008.

In addition to Fed Chairman Ben Bernanke testifying at the House Budget Committee on Monday, October 20, next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Leading Indicators (October 20): Interest rate spread, vendor deliveries, consumer expectations and money supply are the components likely to make a positive contribution in September. Stock prices, manufacturing workweek, initial jobless claims, and building permits are expected to make negative contributions. Forecasts of money supply and orders of consumer durables and non-defence capital goods are used in the initial estimate. The net impact is a 1.0% drop in the leading index during September after a 0.5% drop in August. Consensus: -0.2%.

2. Existing Home Sales (October 24): Sales of existing homes are most likely to have declined to an annual rate of 4.80 million units in September. Consensus: 4.92 million versus 4.91 million in August.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, the direction of the US dollar.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, October 17, 2008.

Equities
Although very volatile, developed stock markets closed the week with fairly good gains – largely as a result of Monday’s record surge – as shown by the MSCI World Index improving by 4.4% after the previous week’s record decline of 20.1%. This was the first positive week since the second week of September. Leading the pack were Italy (+6.7%), Canada (+5.5%), Germany (+5.2%) and Japan (+5.0%)

On the other hand, risk-averse investors caused the MSCI Emerging Markets Index (-4.1%) to stumble further after losing 20.2% the week before. The week’s largest decline was recorded by the Russian Trading System Index, giving up 21.0% to bring its total decline since the Index’s high of May 18, 2008 to 68.2%.

The performance of the Dow Jones World Index (green line) and the MSCI Emerging Markets Index over the past two weeks are shown in the graph below.

The US stock markets all improved over the week as shown by the major index movements: Dow Jones Industrial Index +4.7% (YTD -33.3%), S&P 500 Index +4.6% (YTD -35.9%), Nasdaq Composite Index +3.7% (YTD -35.5%) and Russell 2000 Index +0.8% (YTD 31.3%).

The Dow needs to rise to 10,141 – 14.6% higher than its current level of 8,852 – in order to be officially classified as being in a bull market again. The Index will be required to increase by 22.1% to reach its 50-day moving average and 34.3% to get to the key 200-day line.

Click here or on the thumbnail below for a (predominantly green) market map, obtained from Finviz.com, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.

The investment bank & brokerage group (+28%) was the best-performing group during the past week. Goldman Sachs (GS) and Morgan Stanley (MS) were up on news that the government would provide funding to the two companies as part of a broader effort to restore confidence in the stressed financial system.

The automobile manufacturer group (+26%) was the second-best performer. According to media reports, General Motors (GM) is negotiating a possible merger with privately owned Chrysler.

Five of the ten worst-performing groups last week were related to the commercial real estate market. The worst-performing group was the real estate services group which plunged by 32%. Four real estate investment trust groups were also among the underperformers, showing investors’ concerns about a weakening commercial real estate market brought on by the credit crunch.

The US stock market is in the middle of the Q3 earnings reporting season. According to Bespoke, 159 companies covered by analysts have so far reported their quarterly numbers, of which 60% have beaten estimates, 32% have missed and 8% have reported as expected.

Fixed-interest instruments
As mentioned in the introductory paragraphs, interbank and commercial lending rates started to ease during the past week. The overnight Libor rate dropped to 1.66% on Friday from a high of 6.87% on September 30.

However, at the long and risky end of the credit market the situation was less encouraging, with the spread between the yield on junk bonds and the ten-year Treasury Note yield at 14.51% on October 16, which is higher than the spread of 14.23% on October 10.

Also, credit default swaps (CDS) for emerging markets – notably Hungary, Ukraine and Russia – widened considerably amid concerns about the health of their banking systems.

Movements in government bonds yields were as follows: the ten-year US Treasury Note increased by 7 basis points to 3.95%, the UK ten-year Gilt yield climbed by 20 basis points to 4.67% and the German ten-year Bund rose by 4 basis points to 4.04%. Emerging-market bonds suffered as investors shunned risky assets.

US mortgage rates increased, with the 30-year fixed rate rising by 36 basis points to 6.45% and the 5-year ARM by 5 basis points to 6.01%.

Currencies
The major currencies experienced a relatively quiet week as plans to implement unlimited US dollar currency swaps between the Federal Reserve and other major central banks brought some stability.

Although not a long-term bull on the greenback, Bill King (The King Report) highlighted that the “greatest short squeeze of all time” was occurring in the US dollar, and yen to a lesser degree. “Virtually all US private and public sector debt is a dollar short. The other big short is the yen via the ‘carry trade’,” said King.

Over the week the US dollar gained against the Japanese yen (+1.0%) and Canadian dollar (+1.2%), but lost against the euro (-0.1%), the British pound (-1.4%) and the Swiss Franc (-0.1%).

The announcement of coordinated plans by Australia and New Zealand to safeguard their banking systems resulted in a rebound of their currencies, with the Australian dollar and New Zealand dollar gaining 7.3% and 3.9% respectively against their US namesake.

Emerging-market currencies, especially those with large current account deficits, lost heavily as global recession risks increased. Examples of losses against the greenback include the Hungarian forint (-5.7%), the South African rand (-7.1%), the Turkish lira (-6.4%) and the Korean won (-8.4%).

Commodities
Fears that the deteriorating global economic situation was causing demand destruction resulted in strong selling pressure for all commodities. The Reuters/Jeffries CRB Index dropped by 11.2% during the week, resulting in a loss of 39.7% since its high of July 2, 2008.

The chart below shows the relationship between the CRB Index and the Baltic Dry Index – an index covering dry bulk shipping rates and seen as a rough proxy for global growth.

West Texas Intermediate crude prices on Thursday fell below $70 a barrel for the first time since August 2007, but recovered to $72.13 on Friday to bring the decline since the record high of mid-July to more than 50%. This prompted OPEC, the oil-exporting countries’ cartel, to schedule an emergency meeting for Friday, October 24 to discuss production cuts.

Notwithstanding steep declines in oil and gold prices, Merrill Lynch analysts, according to MarketWatch, said gold prices could hit $1,500 as global plans to rescue the financial industry are set to increase inflation pressures. The analysts didn’t say when gold would hit the price target. They also predicted oil prices will rise to $150 a barrel.”

The following graph shows the past week’s severe declines for various commodities:

Now for a few news items and some words and charts from the investment wise that will hopefully assist in guiding our investment portfolios through these troubled times. And remember the quote from Charles Dow: “Exercise enough patience for six men.”

That’s the way it looks from Cape Town.

Source: Slate

PBS: Bill Moyers talks with comedian Jon Stewart
“Bill Moyers talks with comedian Jon Stewart, host of Comedy Central’s The Daily Show, about how faking the news can reveal more of the truth than all of the Sunday-morning talk shows put together.”

Source: PBS, Bill Moyers Journal, October 17, 2008.

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View original at: Investment Postcards from Cape Town

(GS) Words from the (investment) wise for the week that was (October 13 – 19, 2008)

With the exception of Friday, crude prices closed each day with a gain or loss of more than 1%, with US stocks doing likewise as sentiment waxed and waned on the back of a barrage of economic and corporate earnings reports. Economic data were mixed, whereas earnings were mostly better than feared. After all the action, the S&P 500 Index closed the week virtually unchanged, posting a small gain of 0.2%.

David Fuller (Fullermoney) re-emphasizes that the oil price is currently by far the most important factor in terms of global GDP growth. Consequently it is also a huge influence on the direction of various stock market indices, and big moves up or down have a psychological leash effect on currencies and other commodities.

Source: Financial Times, July 29, 2008.

Also center to the roller-coaster ride was Merrill Lynch (MER), plunging 11.6% on Monday, prior to announcing drastic steps to right its capital position on Tuesday. Its stock fell by 9.5% to a 10-year low on the news, but then rebounded to finish the day 7.9% higher.

Traders speculated that the latest capital raise was a sign that the worst was over for financials, but Meredith Whitney, analyst of Oppenheimer & Co and “godmother” of financials, had no illusions and said in an interview that 25 institutions would have to bolster their balance sheets within the next two months.

Offering some reprieve to the financial sector, the Fed, together with the European Central Bank and the Swiss National bank, announced that “emergency” lending facilities to bolster the money markets would stay in force until January 30. The facilities were implemented to improve liquidity arising from the credit market turmoil.

Formalizing the housing bill, President Bush signed into law legislation to support homeowners facing foreclosure and to offer a lifeline to Fannie Mae (FNM) and Freddie Mac (FNM).

Separately, the SEC is extending its temporary restriction on naked short selling on 19 financial institutions until August 12.

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. It is quite obvious that the key areas last week were “banks”, “prices”, “inflation” and “growth”, with “housing” and “financial” also prominent. As the saying goes: A picture paints a thousand words …

Volatility of the S&P Financials Index is as high as it has been since 1987. Gavekal states: “Spikes in volatility have often signaled a turning point.” I maintain that what is good for the banks is good for the overall stock market and vice versa, and one should pay particular attention to this group.

Stock Trader’s Almanac alerts us that August typically ranks among the worst months of the year and anchors the middle of the worst four months of the year, namely July to October. “The month is generally weak in the first half, then stronger in the middle,” says editor Jeffrey Hirsch.

This is an exceptionally difficult market to read. In my opinion, we are still in a primary bear market, but this does not preclude powerful rallies. From a short-term perspective, a decline below the July 28 lows will cause a serious headwind for any recovery rally, whereas a drop below the mid-July lows will significantly increase the risk of another general sell-off. On a multi-year horizon, we are probably in for an extended convalescence period of relatively low returns. In short, not a dartboard market, but also not necessarily bad from a canny stock-picking perspective.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy
“The global economy continues to skirt recession,” according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com. “While the US, European and Japanese are contracting moderately, the Asian economy continues to experience growth that is near its potential and South American growth is just below potential.”

Economic reports released in the US during the past week included the following key data:

• Real GDP increased by 1.9% in the second quarter at an annualized rate, below the consensus expectation of 2.4% growth. Over the past year, real GDP has increased by 1.8%. Growth was 0.9% in the first quarter, revised downward from 1% last month. Relative to the first quarter, trade and consumer spending were positives for growth; there was also a smaller decline in homebuilding. A large drop in inventories offset these positives to some extent.

• The economy lost fewer jobs than expected in July, but it is certainly not out of the woods yet. Payrolls fell by 51,000, while losses for the previous two months were revised downward. However, the unemployment rate increased by 20 basis points to 5.7% – the highest level in more than four years.

• The Institute for Supply Management’s Manufacturing Index inched slightly lower to 50 for July compared with June’s 50.2. The modest dip is about on par with expectations and the ISM Index is consistent with a sluggish economy that has avoided a severe downturn.

• The Conference Board Index of Consumer Confidence rebounded slightly in July, rising to 51.9 from June’s 51.0 (revised from 50.4).

Summarizing the economic situation, Drew Matus, economist of Merrill Lynch, said in a research report: “Recent data releases and reports suggest that the consumer will continue to be pressured on all fronts: income (or cash flow), wealth and credit. Consumers can spend using any of these buckets. However, with the labor market continuing to weaken, housing continuing to deteriorate and credit harder to come by, the outlook for spending remains bleak despite recent declines in gasoline prices.”

“The US may now be in a ‘very long’ recession that will drive the unemployment rate higher, with little that the Federal Reserve can do to help,” remarked Harvard University’s Martin Feldstein. “I don’t see recovery on the horizon,” Feldstein, who headed the National Bureau of Economic Research until June and serves on the group’s recession-dating panel, said in an interview with Bloomberg.

Hat tip: Barry Ritholtz’s The Big Picture, July 31, 2008.

As far as the Fed’s upcoming interest rate decision on Tuesday is concerned, Asha Bangalore (Northern Trust) said: “It is nearly certain the Fed will leave the Federal funds rate unchanged at the August 5 meeting. The market expects a higher Federal funds rate at the end of the year. We do not. The details of the GDP report point to significant weakness in the economy. Against this backdrop and financial market fragility, the Fed would only exacerbate the economic situation by raising the Federal funds rate in haste. Fighting inflation will have to remain on the back burner until financial and economic conditions improve. By that time, inflation is likely to be moderating as it is a lagging economic process.”

Asha’s colleague Paul Kasriel (Northern Trust) added: “If it walks like a recession and talks like a recession, it must be a recession. Is the Fed going to raise its funds rate target over the remainder of 2008? Not bloody likely!”

In the Eurozone, inflation accelerated to the fastest pace in more than 16 years, with the 15-nation number rising to 4.1% in July. Furthermore, economic sentiment declined to its lowest level in five years and the manufacturing PMI dropped to 47.4 in July from 49.2 in June. (A value below 50 means contracting activity.) Germany, the largest economy of the region, seems destined to record negative GDP growth in the second quarter.

Also, the data from Britain remain grim, with the Nationwide Housing Price Index falling for the ninth consecutive month in July (down 8.1% since a year ago), consumer confidence plunging to its lowest level since the survey began in 1974, and the manufacturing PMI dropping from 45.9 in June to 44.3 last month – the lowest reading since December 1998.

Moving to Asia, industrial production in Japan contracted 2% month to month in June, making it three down-months out of the past four. Inflation accelerated to 1.9% in June, the fastest pace in more than a decade.

China’s manufacturing PMI dropped below 50 for the first time since 2005, suggesting a contraction in manufacturing that is hurt by both slower exports and higher input costs.

In summary, a more pronounced slowdown in global economic activity is rapidly manifesting itself.

WEEK’S ECONOMIC REPORTS

Source: Yahoo Finance August 1, 2008.

In addition to the Federal Open Market Committee interest rate announcement (Tuesday, August 5) and Bank of England and European Central Bank rate decisions (Thursday, August 7), next week’s economic highlights, courtesy of Northern Trust, include the following:

1. Personal Income and Spending (August 4): The earnings and payroll numbers for June indicate moderate growth in income (+0.2%). Auto sales fell to an annual rate of 13.6 million from 14.3 million in May. Non-auto retail sales were lackluster, excluding price-related hikes in gas and food sales. All of the available information points to a steady reading of consumer spending in July. Consensus: Personal Income -0.2%, Consumer Spending 0.5%.

2. Other reports: Factory orders (August 4), Pending Home Sales (August 7), Productivity and Costs (August 8).

Click here or on the thumbnail below for a summary of Merrill Lynch’s economic and interest rate forecasts.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, August 3, 2008.

Equities
Global stock markets, in general, ended the volatile past week in the red, with the Dow Jones World Index registering a loss of 0.6%.

The Japanese Nikkei 225 Average was the worst performer among developed markets, declining by 1.8%.

The emerging markets category included a mixed bunch, varying from Turkey (+14.4%), the Philippines (+2.9%) and India (+2.7%) that performed strongly, to the less fortunate markets such as Pakistan (-7.8%), Taiwan (-3.2%) and China (-2.2%).

The MSCI World Index has been outperforming the MSCI Emerging Markets Index over the past month (-2.5% versus -4.2%), the past three months ( 9.4% versus -12.6%) and the year to date (-14.0% versus -16.4%). (Click here for a comprehensive global stock market performance round-up.)

The US stock markets were mixed, with mid-cap and small-cap stocks outperforming their larger counterparts. The major index movements were: Dow Jones Industrial Index -0.4% (YTD -14.6%), S&P 500 Index +0.2% (YTD -14.2%), Nasdaq Composite Index 0% (YTD 12.9%) and Russell 2000 Index +0.8% (YTD -6.5%).

Click here or on the thumbnail below for a market map, courtesy of Finviz.com, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.

The paper products group was the best performer for the week, rising by 18%. Both members of the group, International Paper (IP) and MeadWestvaco (MWV), rose after posting better-than-expected earnings reports. The personal products group was the second-best-performing group, up by 14%, led by Avon Products (AVP), which reported earnings in excess of the analyst consensus estimate.

The real estate management and development group was the worst performer, down by 26%, led down by its single member, CB Richard Ellis Group (CBG), which reported earnings substantially below expectations. The specialized finance group (-7%) was also among the underperformers. Stock exchange operator NYSE Euronext (NYX) reported earnings that were slightly below the consensus estimate.

As far as corporate news was concerned, Exxon Mobil (XOM) – the world’s largest company by market capitalization – posted a 14% increase in net income to $11.68 billion, marking the largest quarterly profit in US history.

General Motors (GM) declined by 14%, swinging to a massive $15.5 billion second-quarter net loss as consumer preferences shifted away from large trucks and SUVs in the face of record gasoline prices.

Fixed-interest instruments
Government bonds gained ground as the global economic outlook worsened and the prospects faded of interest rate increases any time soon.

The two-year US Treasury Note dropped by 21 basis points during the week to close at 2.51%. Similarly, the UK two-year Gilt yield declined by 19 basis points to 4.86%, the German two-year Schatz yield by 17 basis points to 4.27% and the Japanese two-year bond yield by 3 basis points to 0.75%.

US mortgage rates also declined, with the 15-year fixed rate dropping by 7 basis points to 5.97% and the 5-year ARM 9 basis points higher at 5.95%.

Credit markets eased somewhat as shown by the slightly narrower spreads of both the CDX (North American, investment grade) Index and the Markit iTraxx Europe Crossover Index.

Currencies
Currency traders’ benign view of the US economic situation caused the US Dollar Index to rise by 0.9%.

Individually, the greenback gained ground against the euro (-0.9%), the British pound (-0.8%) and the Swiss franc (-1.3%), but lost marginally against the Japanese yen (+0.2%).

The Australian dollar declined sharply on indications that the Reserve Bank of Australia would seriously consider cutting interest rates at its policy meeting next week. With the Chinese manufacturing PMI falling below 50, concerns were also raised that Chinese demand for Australian commodities might have peaked.

Commodities
Crude oil prices seesawed during the past week, with West Texas Intermediate hitting a high of $128.60 and a low of $120.80, settling the week with a 1.5% gain as a result of an unexpected drop in gasoline inventories. Oil lost 11.5% during July – the biggest monthly decline in absolute terms in 25 years and in percentage terms since 2004 – on concern that global consumption is falling amid slowing economic growth.

Platinum (-5.5%) and palladium (-4.2%) came under heavy selling pressure as poor results from the vehicle manufacturers stoked fears of much weaker demand. Gold bullion (-2.1%) experienced further weakness, but silver (+0.8%) bucked the trend.

The chart below shows the past week’s performance of the various commodities.

Source: StockCharts.com.

Now for a few news items and some words and charts from the investment wise that will hopefully assist in preserving our capital in these demanding times. And remember the old Boy Scout motto: “Be prepared” for all eventualities.

Source: Slate

Barron’s: Nouriel Roubini – $2 trillion of credit-related losses

Source: Robin Goldwyn Blumenthal, Barron’s, August 4, 2008.

Charlie Rose: A conversation with Pimco’s Mohamed El-Erian

Source: Charlie Rose, July 24, 2008.

CNBC: Housing, economy still far from recovery – Greenspan
“Former Federal Reserve Chairman Alan Greenspan said the US is ‘nowhere near the bottom’ of the housing slump and is ‘right on the brink’ of a recession.

“In an exclusive interview on CNBC, Greenspan said the US economy is holding up ‘rather well’ considering the ‘extraordinary pressures from the financial sector’. But he added that a recession appears inevitable.”

Click here for the full article.

Editor’s comment: Greenspan has been the world’s worst economic forecaster.

Source: CNBC, July 31, 2008.

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View original at: Investment Postcards from Cape Town

(MER) Words from the (investment) wise for the week that was (July 28 – August 3, 2008)

FC Stone Group, Inc. is a commodity risk services company that provides risk managements and execution tools to commercial customers. The company was founded in 1968 and is headquartered in Kansas City, Missouri.

A Strong Quarter

FC Stone has been cashing in on the increased volumes and volatility in the agriculture markets, as seen but the company’s impressive second-quarter results, reported on Apr 10.

Revenue came in at $91.2 million, a 52% increase form the same period last year. Net income more than doubled, jumping to $17.8 million from $7 million last year. This produced earnings of 61 cents per share, far ahead of analyst estimates of 37 cents.

A Pattern of Beating Estimates

FC Stone has been on a roll over the last four quarters, having beaten analyst estimates by an average of 12 cents, or 36.22%.

The company noted that it experienced higher volumes in both its exchange traded and OTC (over-the counter) businesses.

Pete Anderson, President and Chief Executive Officer of FCStone said “This growth across all market segments of the company is being driven by unprecedented volatility in virtually every commodity and financial market around the world. During a period of tightening credit access, this has fostered an atmosphere which has increased the necessity to manage volatility through conservative risk management services, products, platforms and structures offered by FCStone.”

The analyst community is bullish on FC Stone, with the current-year estimate advancing to $1.97 per share from $1.68 per share 60 days ago.

The Chart

Shares of (FCSX) have been locked into a very tight channel for the last two months, oscillating between $36 and $42. This is fairly unusual behavior for this stock from a historical perspective. Based upon the company’s growth in earnings, its share price should eventually advance beyond the confines of this channel and accelerate into higher territory.

Content Courtesy: Zacks Investment Research

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(FCSX) – FC Stone Group – over the last four quarters, having beaten analyst estimates by an average of 36.22%