Buy Like Buffett

Here’s my take on each of the financial companies earnings:

Goldman Sachs

It was a great quarter for Goldman Sachs. The investment bank had huge gains from its trading operations and bond offering business. I know that everyone is saying buy Goldman right here and now but I wouldn’t buy the stock at its current levels. The stock is trading at $150 and I would like to know more about the investment bank’s business model will be going forward. Goldman appears to be taking great risks again. Will Goldman’s trading operations be as profitable quarter after quarter? 

JPMorgan Chase

JPMorgan Chase had a mixed earnings season. The banking giant saw its margins, trading and deposits go down. JPMorgan increased its loan loss reserves for the quarter as its loan portfolio saw increasing delinquencies. JP Morgan did have strong results from its commercial banking and asset management businesses. Analyst Dick Bove says “The reality is that this was a very bad quarter for JPMorgan Chase.” “Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable.”

Bank of America

B of A is my favorite bank because of the upside potential but it is also the bank with the greatest downside risk. Bank of America’s earnings were boosted by its sale of China Construction Bank Corp and its strong deposit base. But the nation’s largest bank is still facing rising charge offs from its commercial, residential and credit card loans. CEO Ken Lewis stated that “Profitability in the second half of the year will be much tougher than the first half.” He attributed much of the bank’s success to capital gains.

Citigroup

I think that Citigroup still faces the same problems that have plagued the company for years. Citi does not have core businesses that make money. If you factor out the sale of Smith Barney to Morgan Stanley, Citi would have lost 2.4 billion in the second quarter. While JPMorgan Chase, Goldman Sachs and Bank of America were all able to generate substantial gains from trading operations, Citi was unable to do the same. The promising news for Citi is that CEO Vikram Pandit stated that troubled asset write downs “may be largely behind us.”  This may be true but I still wouldn’t buy Citi even at $2 per share.

Short Term Outlook for 2009

The banking giants were able to post decent results for the second quarter but many of these gains were attributable to capital gains. It is unlikely that these one time gains will be duplicated in coming quarters. Loan losses will continue to grow as unemployment and income levels continue to drop.

Long Term Outlook

When unemployment moderates and the economy rebounds, the earnings power of these mega banks will be realized.

Finance Bank of America, Citigroup, financials, Goldman Sachs, JPMorgan Chase

I have read a few articles late tonight that state that government stress tests show that Bank of America and Citigroup will need to raise billions more in capital. These 2 banks have already received almost 100 billion in funds through the government’s TARP program. These findings illustrate a larger problem facing US banks. IF B of A and Citi need more funds then why doesn’t PNC, Wells Fargo, US Bancorp or Suntrust need more capital? The problem in the banking system is that there is a perpetual cycle. Increases in unemployment lead to greater mortgage delinquencies which result in a decrease in housing prices. This leads to larger asset write downs which require banks to raise more capital. Until unemployment stops rising it will be impossible to predict how much capital banks need to survive this economic downturn. It is clear now that in September of 2008 that the US banking system was insolvent and without the major capital injections from the Treasury; the system would have collapsed.

Finance Bank of America, Citigroup, PNC, US Bancorp

The US Treasury is finally set to unveil its plan to buy toxic assets from banks. The public private partnership is expected to buy up to 1 trillion dollars in bank assets. The government hopes to entice private investors with guarantees and offering low interest loans to remove toxic assets from bank balance sheets. The government will share the risk if the toxic assets continue to decline in value. If these assets are removed from bank balance sheets without additional government ownership then the major banks should see their share prices increase substantially.

The Public-Private Investment Program should benefit Bank of America, Citigroup, JPMorgan Chase and Wells Fargo the most. These are 4 of the largest banks in the country and have balance sheets riddled with toxic assets. The 1 trillion dollar plan should help alleviate some of the problems facing these banking giants. All of the assets that are currently deemed as bad assets are not such and will have some value in the future. If the government holds these assets until the economy improves then the stock prices of the major banks should rise over a time. It may take a few years to see a significant rebound in price but with a plan finally in place the financial sector should improve. I have been a buyer of Wells Fargo, Bank of America and JPMorgan Chase at these distressed prices.

I don’t know if 1 trillion is enough to remove all of the bad assets from the balance sheets of banks but it is a good start.

Investing Bank of America, Citigroup, JPMorgan, Wells Fargo

AIG announced the biggest quarterly loss in the history of the US. AIG lost nearly 62 billion last quarter.

Citigroup looks like it is going to break below $1 per share. It’s time for Citigroup to be nationalized. it’s not Pandit’s fault but I don’t see how he can keep his job with the stock in free fall. Can Citi lure any other highly successful competent executive to take this job right now?

General Electric shares dropped below $8 for the first time since 1993.

Dow Chemical dropped to $7 and Dow is trying to sell off its agribusiness to stay afloat. Dow may be the first company to go belly up after completing a merger. The Rohm & Haas purchase is forcing Dow to sell its most valuable assets just to complete the deal.

Finance AIG, Citigroup, Dow Chemical, GE

Citigroup is down to $1.50 a share amid an agreement with the Federal government to convert 25 billion in preferred stock to common stock. Citi also announced that they will not be paying a dividend. There is no reason whatsoever to own Citigroup stock. The stock is worthless. if you want to see Dow’s future, look at AIG.

Dow Chemical (DOW) sank below $7.20 today.  Every day it seems like Dow Chemical sets a new low.  Dow needs to eliminate its dividend altogether to save capital.

Finance Citigroup, Dow Chemical

Bank of America (BAC) dropped to the $2.50 level today and has a market cap below 15 billion. There is much speculation that the bank will be taken over by the government and nationalized. If Bank of America is nationalized stockholders and debt holders would essentially be wiped out. This weekend will be very telling for Bank of America. I would expect that that government would be in talks with Bank of America about a possible nationalization plan. Even if Bank of America is able to remain private Ken Lewis is a goner. He won’t be able to survive this. There will be various lawsuits from shareholders and debt holders and it’s unlikely that investors have any confidence in his leadership after the Merrill Lynch acquisition. He could have survived the Countrywide purchase but the Merrill Lynch acquisition has likely done him in. He knew about the toxic assets at Merrill and still went ahead with the deal. He may be held liable for not disclosing this information to shareholders. There are also reports that Lewis is losing the confidence of senior management.

Citigroup (C) is in an even worse situation. Citigroup has declined to $1.61 and its market cap is now below 10 billion. This is unbelievable. Citi does not have the deposit base of Bank of America and is trying to sell of assets in a depressed economy. I don’t see anyway that Citigroup can stay a private firm. If Citi breaks the $1 level the former banking giant will have to be nationalized. Pandit may need to go as well. Although he didn’t create all of the Citi’s problems, Pandit may have to go to boost investor confidence in the stock.

Finance Bank of America, Citigroup, Ken Lewis

It appears that something good will come out of the Congressional hearing that the House of Representatives held with bank executives. JP Morgan Chase is joining Citigroup as one of the few “superbanks” that are halting foreclosures temporarily. JPMorgan will be suspending foreclosures until March 6th and Citigroup will halt foreclosures until March 12th. This plan has been announced after bank CEO’s received a grilling from Congress over their use of TARP funds, excessive compensation practices and unfriendly business practices. They were strongly urged by Congress to halt foreclosure proceedings until after the Treasury announces its new plan to help homeowners.

The Federal government is working on a 50 billion dollar plan that would help to stem the tide of rising foreclosures and hopefully bring a bottom to plummeting real estate prices. The government is considering using subsidies to help homeowners make mortgage payments. I think that this is a start but it will take much more than 50 billion to solve this crisis. Ultimately the government will need to get the banks and investors to cut the principal on some of these loans. Loan modifications are the only way that I see to solving the foreclosure crisis. CDO’s and mortgage backed securities have complicated things because you may have a bunch of different investors that have a stake in the same properties.

If a family is living in a house that has a $500,000 mortgage and the house is only worth $350,000; there is no motivation for the family to continue to pay the mortgage. Often the family will just walk away leaving the bank with another home to auction off. The government needs to let banks know that it is better to get something than nothing. Earning $350,000 from the house is better than to auction it off and get much less. Government subsidies will help and should be a part of the plan but a reduction in principal will help even more. A temporary cap on adjustable rate mortgage interest rates and new home buying incentives will help us to start to clean up this mess.

Photo by respres

Personal Finance Citigroup, foreclosures, JPMorgan, real estate

The whole banking sector is bleeding. Bank of America(BAC) has finally hit the single digits on news that the banking giant needs additional capital. Bank of America is dealing with huge write downs from the Merrill Lynch acquisition. Citigroup is trading at $4 and could easily be headed to zero. I wrote a post a while back that Citigroup’s only hope for survival was as a much smaller entity whose primary function is as a commercial bank. Citigroup finally realized this and is selling off assets including the majority of their Smith Barney stake to Morgan Stanley.

My guess is that these aren’t the only major banks that will need more government funds. Wells Fargo, JPMorgan Chase, PNC Bank and even US Bancorp may need additional TARP money. The more capital that these banks borrow, the more that it dilutes shareholders equity stakes. Who knows if Morgan Stanley has enough liquidity to survive and they just purchased Smith Barney? Can anyone say without a doubt that Goldman Sachs will not need more assistance from the government?

My positions page will always show that I hold shares in Bank of America, JPMorgan Chase and Wells Fargo because I have physical stock certificates of these companies. I sold the major portion of my bank stocks because I felt they still had significant room to drop. I have never liked Citigroup as an investment. I still believe that Wells Fargo, US Bancorp and JP Morgan will be profitable long term. Bank of America worries me because they are adopting a business model that is eerily similar to Citigroup. Bank of America has a lot riding on the Countrywide and Merrill Lynch acquisitions.

Economists estimate that the banking industry is only halfway through asset write downs. Banks may need to write off 1 trillion dollars more of losses. Banks are facing increasing home loan losses, rising credit card delinquencies and growing commercial loan defaults. As job losses continue to mount they only add to the pressure on bank earnings.

Bank stocks will continue to be under pressure in the near term. No one has a clue as to what bank earnings will look like for the next year. Citigroup is expected to report a 10 billion dollar loss for the 4th quarter alone. That is incredible. I have to admit that this financial crisis is far worse than I originally thought. I expect that dividends will be eliminated and stock prices will easily take out their 52 week lows set in November. Some banks will hold up better than others but the industry as a whole is not pretty.

Photo by woodleywonderworks

Investing Bank of America, C, Citigroup, JPMorgan, Merrill Lynch, Wells Fargo

Listed below are a few stocks that I have been trading in and out of over the past two months based on when I think shares are cheap.

Bank of America(BAC) dropped to the $10 price level today. As stated in a previous post, I sold off all shares at $17. I am waiting for the stock to hit the single digits and then I will be a big buyer again. A dividend cut is definitely coming. While Bank of America and Citigroup(C) are expected to report big losses for the 4th quarter. Wells Fargo(WFC) and US Bancorp(USB) are expected to be profitable in the 4th quarter.

Alcoa (AA) dropped to $9.50 today. I sold off all of my Alcoa shares at the $12 level because I figured the earnings would be bad. I would be a buyer again at the $7 price level.

General Electric(GE) dropped to $14.70 today. I began adding a small amount of shares again at the $14.90 level. Whenever GE gets below $15, I am a buyer.

United States Oil ETF(USO) is dipping to levels where I would look to add shares. Right now it trades at $31 per share. Below $30 I will look to add shares again.

Intel(INTC) with a 4% dividend yield at $13.57 looks reasonably cheap. I know that technology companies earnings are going to be rough in 2009 but Intel is a good long term investment. I think the stock will get cheaper still and will look to buy at $12.

Finance Alcoa, Bank of America, Citigroup, general electric, US Bancorp, Wells Fargo

I was thinking recently about the failed Citigroup Wachovia deal. As a Wells Fargo stockholder, I was in favor of the Wachovia deal because of the large deposit base that Wells is picking up. The merger will give Wells Fargo a major presence on the East Coast and should increase earnings in the future. But I can’t help thinking, what would have happened if Citigroup had gotten Wachovia? 

Citigroup’s merger with Wachovia would have given Citi a deposit base of 600 billion dollars. Citigroup would have only had to assume the first 42 billion dollars in losses with the government backstopping any additional losses. But I still am not sure if this would have been enough for Citi to stand alone without additional capital injections. Citigroup still has over 1 trillion dollars in off balance sheet assets that have not yet been written down.  I think that the government would have had to pay substantially more to backstop the losses of a Cit Wachovia deal.

Wells probably has the strongest balance sheet of all of the major banks. Their balance sheet should be strong enough to absorb additional losses from Wachovia’s Golden West mortgage portfolio. I am not sure that Citigroup could have handled any losses related to Wachovia’s shaky mortgage portfolio.  I think that this is only the beginning of Citi going to the government for fresh capital. This will only further dilute shareholders. I can only wonder if a merger with Wachovia would have kept Citi from its freefall or accelerated the process.

Investing C, Citigroup, merger, Wachovia, Wells, WFC