The past week has seen a slew of mortgage lender close the door or dramatically scale back operations due to tightening credit markets. So, who will benefit?
Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) look to be the best bets. Why? People, despite reports to the contrary are still buying homes and borrowing money. Their options are dwindling daily as to where they can get those loans, but they are still applying for and getting the them. In the past month despite the “credit crisis” two homes in my neighborhood have sold and a third is on the way. I doubt these are cash deals. The lenders who will have the liquidity to offer the most competitive rates will be the institutions that have depository bases and that is the aforementioned group.
Citigroup and Bank of America said today they drew $500 million from the Fed that in turn was loaned out at higher rates. That means they are printing money. The mortgage business is a very profitable one and banks have seen their profit margins and the multiples on their shares fall the last few years as that business went to the Countrywides (CFC) of the world. With that option closing rapidly for scores of borrowers, they will turn to institutions they can trust to be there. If you were buying a home now would you go to Countrywide with the possibility they may not be lending in 3 weeks? I know the chance is very small but it is still there and if you are buying a home, why risk it? Everyday we get news of another mortgage lender closing shop and any loans that were “in the works” go up in smoke with them. I know Citi, Bank of America and Wells Fargo will have no problem funding a loan and will be here long after I am gone so that is where I would be going were it I needed one.
It may be a bit late for this trend to make a difference in the current quarter but I would expect large changes here by the end of the year.
Expect a rate cut (a token one, but that will be enough for the street) before the end of the year and that will benefit financials. This loan trend should push earnings well above estimates. Now would be the time to be loading up on any of the three.
The best part? The current dividend yields of the three are all hovering around 5% so you will be paid a nice little return to sit back and wait for the stock price appreciation. Recently I picked up more Citigroup on two separate occasions and currently am looking at Bank of America.
Don’t be one of those folks who look back at Christmas this year and curse themselves saying “if only I had bought back then”. I won’t.
Here are todays links worth reading..
– Thanks again to the WSJ Online for another mention yesterday
– I agree
– If you were away for 8 days from the market you missed, well, not much really
– I spell scumbag , “VICK” now. What an awful human being. You know you are trash when OJ can now say “at least I ain’t that guy”
After watching former Goldman Sachs (GS) CEO and current Treasury Secretary Hank Paulson on CNBC Tuesday morning I got to wondering.
Paulson essentially said the the underlying economy is strong and that aside from lenders current paying the piper for “loose lending standards”, things are good. He said the current situation will “extract a small toll on growth” but that economy will weather it just fine. So that got me to looking at some recent numbers to do a little checking.
Recent figures (May – July)
-Industrial production: Up 0.7% or a 2.8% annual rate.
-Personal consumption expenditures: Up at a 4.8% annual rate (July data is not yet out).
-Payrolls: have risen a 1.2% annual rate or an average of 135,000 per month.
-Second quarter real GDP was up at a 3.4% annual rate, and nonresidential investment was up at an 8.1% annual rate.
So, is anyone surprised that earnings forecasts for companies other than the financials have not been lowered?. Forecasts of earnings for the S&P 500 in aggregate for Q3 and 4 have not been lowered by any significance over the past few weeks despite the problems in credit markets the the stock markets gyrations. Current expectations call for about 5% growth in the Q3 and about 10% in the 4th.
Why then would we want the Fed to lower rates to save poor lenders? Banks like Wells Fargo (WFC) and M&T Bank (MTB), both of whom have conservative lending practices are not feeling the effects of “sub-prime defaults”. They have no need for a fed bailout, it is only those lenders who thought lending $500,000 to a person without any verifiable income or any money to put down was a neat little idea.
I have stumped here repeatedly for the Fed to do nothing with the Fed funds rate and still hope they resist the calls from irresponsible lenders. Let them fail, maybe we will get more responsibility from lenders. Even if the Fed did lower the rate, 1/2%, this would have ZERO effect on those people with adjustable rate mortgages that are getting ready for a reset and will not be able to afford the new payment. ZERO. Those people, to be honest, are not much better than the lenders who gave them the loans in the first place. Rates have been rising steadily for the past year and they had plenty of chances to refi the mortgages last year before the bottom fell out of the market. If they didn’t, well, too bad. Plese do not waste my tax dollars bailing these folks out. They are in a self induced predicament. What is more important now is getting the point home that if you lend money (or borrow) it and do not demonstrate a solid ability to pay it back, you are responsible for the outcome.
In response to those screaming for a Fed Funds cut, Richmond Federal Reserve President Jeffery Lacker said on Tuesday, “Financial market volatility, in and of itself, doesn’t require a change in the target federal funds rate”. He also referred to the Feds stated goal on maintaining inflation. “While the most recent months’ figures have been encouraging, it is still too soon to be confident that the moderation we have been seeing represents a downward trend”. The risk that inflation will fail to moderate, “is still relevant, although some recent reports have been encouraging” he said. Translation? Who cares how the market jumps all around, long term results are what we care about.
Inevitably these loan will be no good and the pain will be felt, let’s just pull the band aid off fast and get it over rather than prolong the inevitable.
Then we can move on the the next manufactured crisis..
Here are today’s picks and Tuesday’s results…
TODAY’S PICKS
Jeff Macke recommended selling Take-Two Interactive (TTWO). Open $14.55
Pete Najarian likes Under Armour (UA). Open $66.91
Guy Adami preferred Target (TGT). Open $60.10
Constance Hunter said Desarrolladora Homex (HXM) is a buy. Open $50.60
TUESDAY’S RESULTS
Jeff Macke said sell Abercrombie & Fitch (ANF). Open $78.10 Close $79.38 Gain $1.28
Pete Najarian liked Atmel (ATML) due to unusual options activity. Open $4.86 Close $5.09 Gain $.23
Guy Adami preferred Freeport-McMoRan (FCX). Open $79.96 Close $81.29 Gain $1.33
Stacey Briere Gilbert also recommended buying Freeport-McMoRan (FCX). Open $79.96 Close $81.29 Gain $1.33
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation week)
Adami= 18-12 Gain $32.14
Bolling= 10-11 Loss $14.01
John Najarian= 13-3 Gain $15.54
Macke= 21-17 Gain $3.89
Pete Najarian= 13-8 Gain $24.79
Seymore= 3-2 Loss $.49
Finerman= 3-2 Gain $1.21
Stacey Briere-Gilbert= 2-0 Gain $1.61
It would seem Maria is back doing what she does best, not trying to be Erin Burnett
Now it is only a day but Maria was back behind the desk at HQ this afternoon and gone were the incoherent and oddly timed giggles and high school antics that had me contemplating driving a letter opener into my temple when the show was on. You want to know something else? She is really good when is just herself.
Rather than looking like a bimbo on screen she now appears what she is, a financial newswomen. She asks intelligent questions and has seemed to cut down on the softball Q & A sessions she had been doing that had caused people to lose interest in her. Based on her history and how she started she clearly has the guts to do the job, the question is, does she still have the desire? Is she too close to the players to ask the really hard questions? She clearly does when the guest is a economist or commentator, we need her to do the same to the CEO she may know. Either that or let another person do the interview.
I want the Bartiromo who used to get knocked around on the floor of the exchange when she started and had the stones to give it back and stand there and tell folks to get out of the way. The Bartiromo of recent years mellowed way too much and the very recent version, let’s just call it a bad dream.
She defined the female financial newswomen for years by being herself. Let’s hope she just keeps doing that.
With all the talk of the upcoming Phillip morrris International (PMI) spinoff from Altria (MO), we seem to have forgot the future of the Phillip Morris USA (PMU) debuts this October.
PMU said on Tuesday it would start selling Marlboro chewing tobacco in Atlanta this October. PMU, the largest cigarette maker with over 50% of the US market said it planned to sell original and wintergreen flavors and long-cut and fine-cut varieties of the product in the test market.
The product will sell for $3 per tin, between the highest-priced and lowest-priced products in Atlanta. PMU said it was using the Marlboro name since smokeless tobacco users believe the brand stands for “flavor and premium quality.”
In late April I posted “Much has been said about the possibility of MO buying UST for the smokeless business. It will not happen. Why? Smokers are quite possibly the most brand loyal folks out there, chew users, not so much (I speak from experience, used to be one). What does MO have? The #1 brand of cigarettes with over 50% market share. If they introduce a new product, it will be accepted much like the instant acceptance a new Budweiser product gets by beer drinkers. It will receive a trial by chew users who will be inclined to like it as it will be perceived as being a quality product. They will have no problems abandoning their current product to try the new Altria one. The cost/benefit of a self-produced product vs. an acquired product is huge for us shareholders as it leaves billions to be returned to us.”
I love the idea of a Marlboro branded chew product. I have very little doubt it will be an immediate hit. Several people I know who chew are excited about the product and are definitely going to give it a test when it is available.
With smoking rates in decline, a new product with the Marlboro brand label will be a big boost to Altria’s (and us shareholders) coffers.
With the anticipated success of this product, a fat dividend increase, a big share repurchse, and the PMI spin all expected soon, it looks to be a very exciting fall for shareholders.
Here are todays links of note…
– Have you ever got burned by an “analyst call” that did not work out? Take this advice
– After a Thornburg (TMA) Co-Founder said on CNBC that mortgage markets other than deposit backed are almost at a standstill and they cannot give guidance because of the business uncertainty, here is a gusty analyst call.. Yes, this is dripping with sarcasm.
– When things get crazy it always makes sense to Remember A Classic Theory
– Diet Coke brags it is only 1% crap that is bad for you
– Some Random Thoughts by Adam Warner about Bernanke and Cramer.
It is Buffett rumor time again. Every he did a CNBC interview and said that “opportunities would arise” from the current state of affairs, pundits have been having Berkshire Hathaway (BRK.A)_buying every mortgage lender out there. Ignore them
Why? Can anyone name the last time Buffett bought shares in a company on the open markets when people thought he would? Me either. Shares of Countrywide (CFC)jumped 10% yesterday when the Wall St. Journal simply opined that he may be a buyer or parts of the company. No facts, just an opinion. How large would the premium be for Buffett if word got out he was actually buying the company or made an offer for it? That fact alone eliminates an open market purchase of the lender.
What is likely? Buffett will probably buy dirt cheap mortgage backed securities he deems risk advantaged. What I would expect to be announced would be Buffett taking a multi billion dollar bet on mortgages perhaps in a private transaction they issue Buffett debt or preferred convertibles to provide a specific lender with necessary liquidity. During the Enron induced energy company meltdown at the turn of the century, Buffet made bets with convertible securities that turned out to be very profitable investments.
I just cannot imagine Buffett making any open market purchase. I would be very surprised on the other hand if he was not somehow involved in the cleaning up of this mess.
UPGRADES
Anheuser-Busch BUD AG Edwards Hold » Buy
National City NCC BMO Capital Markets Underperform » Market Perform
Huntington Banc HBAN FTN Midwest Neutral » Buy
UCBH Holdings UCBH FTN Midwest Neutral » Buy
Lamar Advertising LAMR Stifel Nicolaus Hold » Buy
Universal Compression Ptnrs UCLP Wachovia Mkt Perform » Outperform
Dollar Tree DLTR Wachovia Mkt Perform » Outperform
Amerigroup AGP Jefferies & Co Hold » Buy
First Solar FSLR Deutsche Securities Hold » Buy
Darden Restaurants DRI CIBC Wrld Mkts Sector Perform » Sector Outperform
DOWNGRADES
Seacoast Banking SBCF Stifel Nicolaus Hold » Sell
Brookdale Senior Living BKD Stifel Nicolaus Buy » Hold
USG Corp USG Matrix Research Buy » Sell
Here are Tuesday’s picks and Monday’s results.
Picks for Tuesday
Jeff Macke said sell Abercrombie & Fitch (ANF). Open $78.10
Pete Najarian liked Atmel (ATML) due to unusual options activity. Open $4.86
Guy Adami preferred Freeport-McMoRan (FCX). Open $79.96
Stacey Briere Gilbert also recommended buying Freeport-McMoRan (FCX). Open $79.96
MONDAY’S PICKS
Jeff Macke said Whole Foods Market (WFMI) is a buy. Open $44.30 Close $43.47 Loss $.83
Karen Finerman liked Trinity Industries (TRN) for the railroads. Open $33.27 close $33.60 Gain $.33
Guy Adami preferred Deere & Co (DE).Open $124.61 Close $128.27 Gain $3.66
Pete Najarian recommended Citigroup (C) as a big bank. Open $48.81 Close $48.39 Loss $.42
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation week)
Adami= 17-12 Gain $30.81
Bolling= 10-11 Loss $14.01
John Najarian= 13-3 Gain $15.54
Macke= 20-17 Gain $2.61
Pete Najarian= 12-8 Gain $24.56
Seymore= 3-2 Loss $.49
Finerman= 3-2 Gain $1.21
Gilbert= 1-0 Gain $.29
Here are links to items of interest…
– Every wonder where the person calling you on your cell phone is? Blackberry users will know soon enough.
– Thank you to the WSJ Online for quoting me last week
– Whitney Tilson, whose reasoning I just love has a great article about the current market conditions
– Last week I wrote about Warren Buffett’s comments on lenders and their current situation. Here is the video of those comments
– Is it just me or is it embarrassingly early to be selling refurbished iPhones?
In contrast the Home Depot’s (HD) earnings last week, Lowes (LOW) reported today and the news was generally good.
Earnings rose 9% to $1.02 billion, or 67 cents a share, in Q2, up from $935 million, or 60 cents a share last year. Analysts had expected 61 cents a share, according to estimates. Sales also rose 5.8% to $14.2 billion due to the opening of 26 new stores. Sales at stores open at least a year fell 2.6%, in line with the company’s expectations of a drop of as much as 3 percent. This is in contrast to the 15% decline in earnings at Home Depot.
Lowe’s called the current environment “challenging” as the U.S. housing market depressed results in some areas, but said it had gained market share in 15 of 20 product categories (they did the same last quarter also). During a conference call Chairman Robert Niblock said, “There are signs of improvement in certain areas of the country,”. The U.S. Northeast, he said was showing signs of improving sales in big-ticket installations. U.S. markets where housing hadn’t accelerated much in recent years delivered positive same-store sales, Lowe’s said. This is big. It means that in non-bubble areas they are thing are not desperate and Lowes in making big progress.
When one looks at this report one would be inclined to think we may be bottoming and there is light at the end of the tunnel while a look at the Home Depot call would lead one to think we are in a free fall. While I am not a buyer of either company right now, this earnings reports does cement in my opinion that Home Depot is years away from being a potential investment.
Lowes is managing through these tough times and taking market share from Home Depot quarter after quarter. When housing does turn around, Lowes will be in much better shape. When you look at the two you have to conclude Home Depot is just a mess and they aren’t doing anything to lead one to think things will get any better anytime soon.
Lowes proved today that is is not necessarily the shopper but where the shopper decides to shop.