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Banks Rally as Obama’s Economic Team Waits On Deck

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The stock market sustained a significant rally on Friday as the markets are anticipating President Obama and Treasury Secretary Geithner to outline a further iteration of the ongoing bank rescue package on Monday.  Also demonstrating the interplay between politics the economy, January’s jobless data is adding to pressure on Congress to get the economic stimulus package pushed through.  The unemployment data was grim, but better than some had predicted on Monday morning.  In total the U.S. economy has lost 3.6 million jobs since the recession began more than a year ago, but the jobless declines have accelerated as half of those losses occurred in the last three months.  The jobless rate now sits at a 16 year high and these results seemed to make investors believe that the Obama administration has no choice but to give another bailout to the financial system under the pressure of the worsening economy.  In regards to the stimulus package caught in a partisan struggle in the house, the President said,

“These numbers demand action.  It is inexcusable and irresponsible for any of us to get bogged down in distraction, delay or politics as usual while millions of Americans are being put out of work. Now is the time for Congress to act.”

Among some analysts, there is a sentiment that the worst is behind us now, as economic data has fallen off so rapidly in the last quarter that the pace is likely to slow or even flatten in the coming months.  Many banks which have been among the hardest hit thus far in the recession spiked up as Bank of America (BAC) lead the charge up more than 26% with Wells Fargo (WFC), Citi (C), and JP Morgan (JPM) all up well over 10%.  Bank of America’s CEO Ken Lewis strongly renounced any possibility of nationalization, saying he had never heard any government official mention it and that the rumors were “absurd.” 

While Lewis may be right (Why would he lie?) and Senator Chris Dodd echoed his sentiment, but there are still significant concerns that there has not yet been a turn around in such fundamental problems in the U.S. economy as unemployment, slacking consumer demand, slumping home values and sluggish credit markets continue to weight the system down.  We urge caution to those thinking about jumping head first into the financials that look so attractive based on historical valuations.  While it may feel like a year, we are just 4 months removed from the breakdown of the financial system last October.  A meltdown like that will take time to work its way through the financial system, even with a significant government effort.  Furthermore, if you believe that this is more than a bear market rally, there are less risky ways to gain exposure to the depressed stock market.

This will be an interesting weekend for the stimulus plan, but we do not foresee either side giving up the fight anytime soon.  As far as Monday’s speech by Timothy Geithner, it is speculation at this point, but the latest reports suggest the proposal will revolve around recapitalizing the banks.  The government will take further equity stakes in banks but with more restrictions and higher dividends required of the banks receiving funds than in TARP I.  Also expected is an easing of the Treasury’s short term lending facility to the banks. 

President Obama will be careful not to make this look like a bailout of Wall Street, as a study released earlier this week from the Congressional Oversight Panel found that the first TARP program overpaid by $78 billion for the assets acquired.  Henry Paulson would be quick to argue that the stakes he took in banks are investments and cannot be properly evaluated until they are redeemed.  The much debated “bad bank” proposal has lost some steam among Obama’s advisors, although it has not been ruled out completely.  Perhaps most importantly, the package is expected to include a foreclosure-prevention program, in an effort to stabilize the housing market.

Expect to see another volatile day of trading on Monday, as it will be very interesting to see if market likes what Geithner has to say or if the lack of emphasis on the bad bank taking toxic assets of the books presents a problem.  Do not be surprised if the large banks give back all of their gains today.  If you do choose to speculate on financials make sure you have the stomach for the wild ride that will likely continue for quite a while.

Ockham Research Staff @ February 6, 2009

Think Long-Term for Walmart

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January’s industry-wide retail same-store sales were reported today.  There was a common theme in the report, as retail sales suffered industry-wide, discount retailer Walmart (WMT) gained yet again.  Walmart had anticipated flat to +2% same-store sales, but the results were +2.1%.  By comparison, the industry excluding Walmart suffered a same-store sales decline of 5.7%.  The fact that Walmart has benefited during the recession from value-seeking consumers doing more grocery shopping at its stores is not a surprise to anyone that follows retail, but since we last posted about the company (Retail Staggers Into the New Year) its valuation has become far more attractive.  At the beginning of the year, retailers were reeling from a horrendous holiday shopping season and even mighty Walmart’s shares were smacked down 7% for missing expectations, although sales were still up.  That 7% decline contributed to a 17% decline for WMT year to date.

Walmart and discount retailers like it are perfectly positioned to become the one-stop shopping destination for bargain-conscious consumers.  However, WMT was hovering near its 52-week low prior to Thursday’s trading; it makes you wonder what more can the company do?  Walmart has consistently increased sales and earnings and surpassed the street’s estimates in each of the last four quarters.  Furthermore, it would not surprise us to see this happen again when the company reports on Feb. 17th.  It seems to us that the market is looking at Walmart with both a short-term and overly optimistic expectations.  Walmart is suspending its monthly sales forecasts, which is common in today’s market considering the present economic uncertainty.  This may help somewhat as WMT seems to rise and fall based on each month’s results.

When looking at the longer-term performance of Walmart, it is clear that this is a well run business that has shown consistently positive trends in sales, cash flow and earnings.  Over the last seven years, revenues have grown by 12% annually and while that number has slowed to about 7.5% this year, for a mature business this results are nothing to scoff at.  Similarly, Walmart is translating its increased sales into profits as earnings have grown about 13% per year during the past decade.  Again, earnings growth this year is below that trend-line at only 8% but these are impressively consistent growth numbers for any company, much less the retail behemoth.  Also, Walmart’s same-store sales are consistently tops in the industry.

This could be an opportunity for long-term investors to purchase a company with far better sales and earnings numbers than it had ten years ago but with a stock price that has only appreciated 14% during that time frame.  One has to think that from an investment standpoint Walmart is fundamentally far more attractive than it was ten years ago.  Near term, WMT has outperformed the market and its peers, but with the recent slide in price, it looks increasingly attractive using our methodology.  So, in the short-term Walmart will continue to be the retail industry’s top performer, which should provide a solid floor for the stock but the key for investors remains its consistently impressive growth.  With the company expanding overseas, it has far from saturated the foreign market and Latin America and Asia are key targets for Walmart’s planned expansion in the coming decade.

More on this topic (What's this?)
WMT: January 2009 and 4Q-2009 Sales
Walmart Is Still Money In A Recession
Walmart is Actually Bad for our Economy?
Read more on Wal-Mart at Wikinvest

Ockham Research Staff @ February 5, 2009

Previous Articles

Kraft Results Could Mean Trouble for Kellogg

Kraft Foods reported disappointing earnings today as the strengthening dollar hurt their performance overseas. We expect to see more of the same problems from Kellogg tomorrow, but there may be one silver lining that could save them from currency exchange trouble as well as consumers trading down to store brand.

February 4, 2009

Electronic Arts: Clear Example of Manipulation?

Results for Electronic Arts were released at the close of trading today, and they were bad, very bad. So, what justifies the stock’s rapid rise after hours? It seems to us that it points to hedge fund and mutual fund manipulation, and when that is the reason for a stock’s run up, be very careful as the action could turn in a moment.

More on this topic (What's this?) Read more on Electronic Arts at Wikinvest

February 3, 2009

Citi Bows to Pressure and Doubles Down

Citi released a statement today about its use of TARP funds today, which included $36.5 billion in new lending. However, we are growing concerned that each decision out of Citi these days has been pushed on them by government interests. I guess these are the first signs of the dark side of TARP.

February 3, 2009

BP’s Dividend is Accidentally Enticing

Ockham sheds some light on our valuation of BP with its attractive 8 percent yield. Of course, investors should always investigate a high yielding stock like this to make sure that there is no danger of a dividend cut. Barring something unforeseen in the earnings report tomorrow, we think that BP’s dividend is good to go, making them an attractive buy candidate.

More on this topic (What's this?)
Best High Yield Dividend Stocks for 2009
The Safest Dow Dividend Stocks
Read more on Dividends at Wikinvest

February 3, 2009

The Enterprising Investor’s Guide 2-2-09

The Enterprising Investor’s Guide newsletter for 2-2-09

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Dividends In 2009: Trust But Verify
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Forecasting S&P 500 Volatility
Read more on S&P 500, Holiday Season at Wikinvest

February 2, 2009

Ockham Launches New RazorWire Application

Ockham is pleased to announce the launch of its new information platform designed to combine our valuation analysis with our new business television monitoring tool, RazorWire. We are also pleased to announce that this new combined platform is now available for just $1 per month.

February 2, 2009