Equity Research and Investment Analysis

Analysts anticipate earnings per share in fiscal 2010 of 7 cents, which makes the forward looking P/E multiple hardly cheap at more than 50x. Any worsening in the condition of their debt (no longer guaranteed by the government) would put those slim profits in jeopardy, so even though Citi will now lose the stigma of substantial government assistance there is more risk to shareholders than before. As Cramer suggests, this stock will almost undoubtedly be higher in 2012 and could very feasibly triple, but in the meantime it may be a bumpy ride.

The day of the Citi upgrade all homebuilder stocks got a boost despite much worse than expected housing starts data. However, Pulte has already given all of those short lived gains back and then some in just two trading days. Clearly, this is one stock that both Ockham and Cramer agree cannot be bought at this time, and the upgrade from Citi is odd and lacks any bite.

This month may be an aberration in the general trend of improvement in the housing market, and we sincerely hope that is the case. However, we cannot ignore the fact that homebuilders enjoyed very profitable times as the rode the housing bubble up for better part of the decade. During that time many parts of the country were overbuilt, and that supply overhang is only beginning to clear itself. Foreclosures remain extremely elevated only adding to the supply glut. At this time, we just do not see a compelling reason to invest in homebuilder stocks.

We have an Overvalued stance on Citi at the current price, simply because the fundamentals have dropped so rapidly from their levels of just two years ago. With that in mind, the company has already begun the long road back from the abyss and at least earnings are becoming much less negative in recent quarters and have surprised analysts to the upside the last three quarters.

We agree with Cramer that this is a stock that investors should more readily buy than sell. The Citi downgrade was piling on with the bad news and the resultant drop should be viewed as an opportunity.

The credit crisis hit the private equity business extremely hard, as the seizure of credit markets made deal making a near impossibility. Not to mention the fact that companies already owned were often worth far less than the acquisition price. It is not too much of stretch to say that private equity is leveraged to the general health of the economy; making good times better, but bad times even worse.

Hudson City Bancorp (HCBK) is known for being a very conservatively run bank. It is old-school in this way; they did not get caught holding a lot of sub-prime debt when the credit crisis hit, nor do they make a lot of moves in other risky assets. Instead, management has run their bank by the book lending money to credit worthy borrowers and taking the slow and steady path. They did not need TARP money and they have not raised capital, unlike so many others in their industry. One would think such management would be rewarded, having been through the worst recession since the Great Depression. However, this conservative management style has not found favor in this market.

Yum Brands did pretty much what they have been known to do in recent years. They beat analysts projections for profit, even though top line sales left something to be desired. Aggressive cost cutting and assistance from lower commodity costs as well as a weakening dollar all played a big part in Yum's profits this quarter. However, the company's commitment to expanding their global footprint remains at the forefront of investors minds.

The latest data out of Moody's suggests that investors should remain wary of company's heavily tied to consumer debt. More jobs are being lost each month and even with the pace of those losses slowing, it must be a concern to creditors. Given the run that each of the previously mentioned stocks, we would seriously wonder if the market has prematurely assumed that the family balance sheet has improved substantially. Furthermore, the earning power of these companies could be diminished going forward if consumers are more spend-thrift going forward. A climbing savings rate suggests that consumers may be less likely to turn to the plastic for any unnecessary purchases.

We see the need for caution all around the equity markets right now, as Ben Graham so astutely postulated, "In the short run, the market is a voting machine, but in the long run it is a weighing machine." At Ockham, we are not market timers and we are not advising selling out of all equities to waiting for some impending doom, but we think that this is an opportunity to lighten up and take some risk out of your portfolio. Obviously, we fear that the persistent headwinds of joblessness, the develeraging cycle, and foreclosures may make the market look a little light on fundamentals when it comes time for the weigh-in.

Genworth has seen significant appreciation well in advance of the fundamentals justifying such gains. Analysts are expecting fiscal 2010 earnings of $1.10 which would make the valuation look attractive, but that seems to expect quite a bit out of Genworth’s other units if the mortgage unit will see its peak losses in that year. As capital markets have healed this year, GNW has raised capital through asset sales, a debt offering, and a secondary offering of stock in order to provide a cushion for any future losses.

There is significantly less risk in this bank than probably any other major bank, and their CEO believes that the conventional wisdom regarding New York City is probably too bearish. With a multiple below 13x and a dividend yield around 4.5%, we firmly believe this investment will start to attract some attention as quality becomes more of a premium.

Cramer talked about enormous upside on this deal with Colonial, as their mortgage unit, which had come under DoJ investigation, posses no liability to BB&T. The offering went on sale Tuesday, and so far in morning trading the stock is up more than 2 percent. Clearly, BB&T is having no trouble raising money in the open market.

Clearly, the relaxation of mark to market has served the purpose of giving banks a breather from book value destroying write-downs. However, as Weil exposed, book value is really simply accounting fiction. Many of the credit issues that caused this mess are still yet to be worked out, and at Ockham we remain very wary of bank stocks.

As today's earnings release demonstrates, credit concerns still necessitate fortification of their balance sheet. We will continue advising investors to steer clear of Deutsche Bank for the time being because the recent economic improvements are still vulnerable and the actions of the company do not inspire a lot of confidence in the immediate future.

There were a couple of very interesting pieces of news from the this morning that I believe are important. One, a study by the WSJ, has shown that banks thus far are lending less than before they received the TARP funding. The second comes from a newsletter from John Mauldin that warns of the possibility of more TARP programs headed our way.