Earnings season is a bust... Banks are doing well... Doc's favorite bank... A bullish housing bet... Did you answer Porter's quiz?...
Bank of America released a report showing the stock market's second-quarter earnings season has been a big disappointment...
As of last Friday, 407 of the S&P 500 companies (87%) had reported earnings. So far, 51% of companies have beaten earnings-per-share (EPS) expectations, 38% have beaten sales estimates, and 25% exceeded both. The bank's analysts said that puts us on track to have the worst quarter for positive surprises since the first quarter of 2009.
And remember… earnings, the bottom line, is an easy number to fudge. Accountants can manipulate earnings to jibe with a company's expected or desired numbers.
Sales, however, are harder to manipulate. And about 60% of companies have missed their sales expectations. A strong dollar and slowing global growth hurt numbers. Bank of America said second-quarter sales could decline 1% year over year...
Despite the low volatility for the market overall (the Volatility Index has been under 20 for most of the year... and we consider 30 to reflect high volatility)… many stocks have experienced big swings on earnings news. Companies that beat on both EPS and sales have outperformed the benchmark S&P 500 stock index by 4.4 percentage points in the five days following the announcement. Those that missed underperformed by 3.4 percentage points.
On average, since 2009, stocks that beat earnings and sales outperformed the S&P 500 by 1.4 percentage points. Those that fell short lagged the stock index by 2.9 percentage points.
Accounting gimmicks aside… operating companies have been able to improve their earnings by cutting jobs and slashing other costs. But perhaps the cost-cutting strategy is beginning to falter…
In his May 2012 issue of Retirement Millionaire, Dr. David "Doc" Eifrig discussed strength in the banking sector. Banks, as Doc reminded readers, make money from high loan volumes and good margins. Banks' low borrowing costs enable good margins. (Their "interest rate spread" – the difference between their borrowing cost and rates they charge for loans – is around 5% today.) And loan volumes are increasing. Plus, banks are in great financial shape. As he explained…
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For example, the banks' capital as a percent of assets is the highest it's been since 1938. Bank "capital" is the amount left over after you subtract the liabilities from the assets and add back some things accountants and regulators require. It's like the "net worth" of a bank. Now at 74-year highs, this ratio is a sign that the wealth of a business is growing. |
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And similarly, the liquidity of banks as a percent of assets is at a 25-year high. "Liquidity" measures how much cash and short-term assets are available to be placed into action. If bad times arrive (as in the collapse of global liquidity for several weeks in 2008), good liquidity assures us the company has the cash to cover its needs. And in good times, strong liquidity means the company can pursue lending opportunities and other profitable deals. |
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Taken together... the increasing capital and liquidity measures show that not only are the banks' businesses more valuable, but they have the strength to grow their businesses or avert trouble... |
Doc recommended shares of the $179.4 billion nationwide bank Wells Fargo. The company makes the bulk of its income from traditional retail banking and corporate and commercial loans. It's the largest mortgage lender in the U.S. Today, WFC's banking model is minting cash. The bank has a solid balance sheet and a healthy dividend, which it relentlessly increases.
(Doc's Retirement Millionaire subscribers are up about 3% on WFC since he recommended it… His Retirement Trader subscribers closed their WFC position in July, booking a gain of more than 6% in about four months thanks to Doc's options strategies… And he just recommended they open a new WFC position.)
Warren Buffett, the billionaire founder of Berkshire Hathaway, is Wells Fargo's largest shareholder. WFC is Buffett's favorite bank stock. "They've got a sensational mortgage operation," Buffett told Bloomberg TV last month. "The total mortgage market was at the $3 trillion level not that long ago. If it goes back up to $3 trillion, I hope Wells is doing a third of those."
And Buffett is bullish on housing… Buffett owns a portfolio of companies that provides him with daily information on how the housing market is performing... He owns Acme Brick Company, Benjamin Moore & Co. (paint), Clayton Homes (manufactured homes), and Shaw Industries (flooring), just to name a few.
Our own Steve Sjuggerud, editor of True Wealth, is also bullish on housing. In May, he told readers of our free, daily e-letter DailyWealth…
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I've been pushing this [housing] because it is probably the best investment most American households can make right now – with the potential for huge, tax-free gains and extremely limited downside risk. |
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As of this month, the numbers actually confirm what I've been writing about... |
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The latest numbers are out, and existing home prices are up 10% year over year – the largest jump in home prices since 2006. (New homes, a much smaller portion of the market, are up 4.9% year over year.) |
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There's no denying it now. The real estate market is improving. The uptrend has started. |
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Now is the absolute perfect time to buy a home. |
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... home prices are cheap, cheap, cheap! Homes are more affordable than at any time in American history... |
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The median home price in my home state of Florida now is just $144,350. At current record-low mortgage rates (3.79%), that translates into a monthly payment of $671 a month. (That's principal and interest.) Unbelievable! |
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If the median household earns $48,000 a year (to keep the math easy here), that's $4,000 in income a month. Surely, with $4,000 a month in income, the median Florida household can afford a $671 house payment on a median home. |
New 52-week highs (as of 8/3/12): Berkshire Hathaway (BRK), SPDR International Health Care Sector Fund (IRY), Anheuser-Busch InBev (BUD), Constellation Brands (STZ), Pepsico (PEP), Integrys Energy Group (TEG), Union Pacific (UNP), Target (TGT), and Philip Morris International (PM).
Porter gave Digest readers a quiz in last Friday's piece. Some of your answers are below... You'll have to wait until this Friday for an answer from the "big guy." In the meantime, send your feedback to feedback@stansberryresearch.com
"This one's a cinch... I'd buy call options on CHK and short the living SHITE on either CQP or EOG via put options. Do you agree?
"Thanks for your hard work and integrity – I've learned more from your team than any other publication – not only about investing in general but global finance...
"And I especially dig your militant attitude toward the biased mainstream media... You guys are a menace to society and as the Ice Man said to Maverick, 'You're dangerous.'" – Paid-up subscriber Joe Kelly
"I really enjoy your Friday Digests! Keep up the great work.
"I think Chesapeake is the best buy of the bunch... lowest BOE and priced at 60 some percent of value. There are other possibilities... I hope you will discuss the correct answer in a future digest." – Paid-up subscriber R.S.
"My selection is CHK because of the low lifting cost and (compared to Encana) high earnings (similar to MGM's high earnings). Encana would seem to be more of an outlier but it has high negative earnings." – Paid-up subscriber JS
"My guess would be ECA as having the lowest lifting costs vs. highest EV as % of asset value." – Paid-up subscriber Jim McGovern
Regards,
Sean Goldsmith
New York, New York
August 6, 2012