Category Archives: Market Outlook

Warren Buffett Likes Bank Stocks

25 July 2012
Warren Buffett likes bank stocks, just not investment banks. And for good reason.

By avoiding common stock bets on investment banks like JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley the “Oracle of Omaha’s” financial sector share investments have greatly outperformed most other investors.

Of course, Buffett made preferred share investments in Goldman and Bank of America during the height of the crisis, but these were essentially super-safe loans that guaranteed a return and did not reflect his common stock plays.

In fact, as Buffett continued to hold banks stocks as a key part of a U.S. economic recovery investment, the value investing guru has kept his chips smartly behind Wells Fargo — which is projected to end 2012 as America’s most profitable bank — even if the battered share prices, titanic balance sheets, and boom and bust earnings of money center giants lure some of the sectors smartest investors into sub-par investments.

Although Buffett’s likely to have about the same insight as the “Average Joe” when it comes to a multibillion-dollar “London Whale” trading loss at JPMorgan, investment bank ratings downgrades, and a market manipulation probe that may start with Barclays and spread across Wall Street, his continued investment in the stability of traditional lenders like Wells Fargo, US Bancorp, and M&T Bank, and an investment in credit-card giants American Express, Visa, and MasterCard have greatly outperformed mega-bank stocks.

Since the 2008 Wall Street crash pummeled most bank stocks and a March 2009 stock bottom led to a tripling of the shares of megabanks like Citigroup and Bank of America, and a doubling of JPMorgan and Goldman Sachs within a span of just over a month, many financial sector investors and analysts forecast that those gains could be replicated.

nstead, the nation’s largest investment banks have underperformed, even as their shares gyrated upwards on misplaced optimism of a durable trading or deal making surge.

From March 2009 to May 2009, the largest investment banks were among the financial sector’s top performers, driving many investors including hedge fund titans John Paulson and David Tepper of Appaloosa Management strongly into the stocks of Citi and Bank of America. Since then, Morgan Stanley, Bank of America, Goldman Sachs, and Citigroup shares have all lost over 15 percent — and are among 10 S&P 500 bank stocks out of 85 in total that have lost double digits since May 2009, according to Bloomberg data.

While JPMorgan has gained over 17 percent since then, the Bloomberg data shows that Buffett financial sector picks like Wells Fargo, US Bancorp, M&T, American Express, Visa, and MasterCard have dramatically outperformed those returns. Wells Fargo is up over 30 percent since May 2009, US Bancorp and M&T have posted over 50 percent share gains, and American Express has doubled. Recent new Buffett financial sector picks like Visa and MasterCard are among the financial sector’s best performers in the past 12 months, posting 40 percent-plus gains to go against the Financial Select Sector SPDR’s [XLF  14.27    0.055  (+0.39%)   ] 2 percent share loss.

The data should tell investors that in spite of the press given to capital markets players with volatile earnings and recently battered share prices, they may be better off following Buffett into less glamorous banks stocks that are exposed to consumer and mortgage lending growth, and credit card names that may track rebounding consumer spending.

Fundamental investors may also have reason to follow Buffett, even if it’s less obvious whether superregional banks are a value investment. Following the results of the U.S. Federal Reserve [cnbc explains] stress tests in March, it was many of Buffett’s investments like Wells Fargo, U.S. Bancorp, and American Express, which led the way on share buyback plans and dividend boosts. Wells Fargo boosted its dividend 83 percent and indicated accelerated buybacks to a program launched in 2011. American Express unveiled a $5 billion buyback program of $5 billion and upped its quarterly dividend. Meanwhile U.S. Bancorp boosted its dividend by 56 percent and targeted $3.3 billion in buybacks.

In buying back stock, banks will lower total outstanding shares, thus boosting the proportion of earnings attributable to remaining shares. Using International Business Machines [IBM  191.08    0.74  (+0.39%)   ] as an example, Buffett explained in his annual letter in February how share buybacks can be a hedge to the prospect that a company’s shares underperform.

“When Berkshire buys stock in a company that is repurchasing shares, we hope for two events,” Buffett explained. “First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time, as well.” As a result, Buffett has a fundamental reason not to be concerned if the stock performance of IBM and Wells Fargo — both among his largest holdings with buyback plans — underperform in the near term.

As of March 31, Wells Fargo was Buffett’s second-largest stock investment at $13.2 billion or 7.42 percent of the company’s shares, while he held 13 percent of American Express shares worth over $8.8 billion, and $2.2 billion worth of U.S. Bancorp shares, or 3.6 percent of the company’s float.

But even without Buffett’s buyback math, the expected earnings prospects of traditional mortgage and credit card lenders may trump capital markets-oriented players. In March, we noted that because of Wells Fargo’s near 30 percent annual earnings growth trajectory, Buffett may end 2012 as the largest investor in America’s most profitable bank.

After JPMorgan unveiled a derivatives-related trading loss in May that may exceed $2 billion, Wall Street analyst now project that Wells Fargo will end 2012 as the most profitable U.S. bank, earning $17.7 billion for the year, according to Bloomberg compilations of forecasts. That contrasts to the $17.2 billion in adjusted net income that JPMorgan is expected to earn this year. Wells Fargo will earn the lion’s share of its profit and revenue from mortgage, business and credit-card lending, while JPMorgan’s earnings will be a mix of those businesses and its global investment banking operations.

It’s the distinction between Wells Fargo’s quick earnings ascendance relative to JPMorgan — the longtime profit leader throughout the financial sector — that may best exemplify the simplicity of Buffett’s investing plan relative to the elusive allure of investment banking profits.

JPMorgan, like Goldman Sachs, is undoubtedly a leader in investment banking, with a top three position in most key merger advisory and debt and equity underwriting markets. Still, a near 30 percent year-over-year lull in those businesses means that even top brands aren’t expected to post strong earnings. In fact, it’s the counterintuitive accounting gains that investment banks may post on the falling value of their debt after Moody’s slashed sector ratings that may be among the biggest positive surprises in second-quarter earnings.

Although many, like JPMorgan Chief Executive Jamie Dimon, expect that investment banking revenues will have a big comeback as companies enter a cycle of mergers and initial public offerings [cnbc explains] that was postponed by the European debt crisis and political gridlock in Washington, some think the industry’s woes may be lasting.

“[We] think the slowdown in capital markets revenues is more structural than cyclical,” wrote Standard & Poor’s credit analyst Richard Barnes in a July 2 note that outlined why the ratings agency sees new regulations, high expense and lasting macroeconomic risks as reason to question whether investment banks will even be able to out return their cost of capital in coming quarters and years.

The prospect of trading losses like those booked by JPMorgan and added political and regulatory pressures on the heels of a $450 million fine that Barclays paid to U.S. and U.K. regulators for its manipulation of short-term interest rates, and which cost CEO Bob Diamond his job, augur as added risks. Meanwhile, S&P’s outlook for investment banks is similar to what drove Moody’s to ratings cuts in June.

As it turns out, its Buffett plays like Wells Fargo and U.S. Bancorp remain a source of financial sector strength headed into second-quarter earnings, which are likely to be relatively disappointing. On Thursday, Credit Suisse analyst Moshe Orenbuch cut his earnings estimates for JPMorgan, Citigroup, and Bank of America because of their sensitivity to the weakness of capital markets. Among large-cap [cnbc explains] banks, Orenbuch left his earnings estimates for Wells and U.S Bancorp unchanged, while noting that throughout the industry, weaker capital markets revenue may be offset by loan growth and cost cuts.

Expectations of a housing construction rebound and mortgage demand have even given some reason to expect that Wells Fargo may surprise on the upside for the remainder of 2012. Amid continued uncertainty about the global economy, JPMorgan analyst Vivek Juneka said Wells Fargo was his best large-cap bank investing idea, in a June 2 sector outlook that cited the bank’s mortgage origination and loans businesses as standing apart from peers. Among mid-cap and small-cap banks, JPMorgan analysts highlighted First Horizon National as a top pick.

For those who are ready to throw in the towel on large-cap bank stocks like JPMorgan, Bank of America, and Citigroup, following Warren Buffett’s focus on capital returns, stable business models, and faster-than-industry average growth may be a simpler and more effective strategy.

Source – Street.com

Warren Buffett On Euro

25 July 2012

Warren Buffett says he’s worried about the fate of the euro zone, however despite signs of recent weakness, he remains optimistic about the US economy.

­Speaking about Europe, the 81-year old legendary investor and billionaire referenced Abraham Lincoln, saying a house divided cannot stand as he addressed the Economic Club of Washington.

“They can’t have a common currency, but not common fiscal policy or culture,” Buffett said. “It can’t be half slave and half free.” “European leaders need to resolve some of the union’s weaknesses.”

Buffet’s comments come as finance ministers and central bank governors from the Group of Seven economies agreed on Tuesday to coordinate responses to the crisis which threatens to destroy the region’s 17-nation currency union as Greece considers leaving the euro.

As Buffett touched upon the US, he was more positive, saying there is little chance the nation will slip back into recession in the near term, warning however that a second recession is unlikely “unless events in Europe develop in some way that spills over in a big way.”

He said Washington must address an unsustainable fiscal situation, claiming that both political parties deserve blame for the federal government’s failure to reduce the deficit. Buffet said Democrats must give in on cutting some social programs while Republicans can’t continue to stand in the way of tax increases.

Buffett, who is the Chairman of the Berkshire Hathaway holding company, also reaffirmed his support for the so-called “Buffett Rule.” The White House’s website describes the rule that no household making more than $1 million should pay a smaller share of their income in taxes than middle-class families pay.

“The Buffett Rule would limit the degree to which the best-off can take advantage of loopholes and tax rates that allow them to pay less of their income in taxes than middle-class families.”

The plan would require wealthy Americans to pay a 30 percent tax rate – a levy that would surely hit the billionaire more than the average American. Currently, like many wealthy Americans, much of Buffett’s income comes in the form of capital gains and dividends, which are taxed at lower rates than incomes.

Buffett joined the tax debate last August as he said he paid a lower tax rate than his secretary, claiming this to be unfair.

Source -rt.com

Warren Buffett sounds on 2013 Recession

As concerns mount that the United States is headed for a recession, two famous minds offered opposing takes on what’s in store for the U.S. economy.

In one corner was the Oracle of Omaha, Warren Buffett; in the other, the 42nd President of the United States, Bill Clinton.

Speaking at the 25th anniversary dinner of the Economic Club of Washington, Buffett said that it is unlikely the U.S. economy will fall into another recession. He said the chances of that happening are “very low.”

Buffett, who blames both political sides for the budget deficit, once again called for raising taxes and cutting spending.

“The problem is the Democrats don’t want to talk about what expenditures they would cut and the Republicans don’t want to talk about raising revenues,” he said.

Buffett said “the big question” remains what’s ahead for the euro.

“We’ve got this system where they’re half in and half out,” said Buffett, who is currently auctioning off a lunch with himself this week on eBay for charity. “They have to reconcile these things.”

Reflecting on the Eurozone he said there is the possibility the U.S. will feel a “spill over” effect from Europe – which some would argue has already happened.

Recession 2013: Clinton’s Take
In a taped interview that aired Tuesday on CNBC’s “Closing Bell,” former President Clinton said he thought the U.S. economy was already in a recession.

Clinton called out Republican efforts to cut the deficit, saying they jeopardize the country’s chances to get out of the debt debacle.

“What I think we need to do is find some way to avoid the fiscal cliff, to avoid doing anything that would contract the economy now, and then deal with what’s necessary in the long term debt-reduction plans as soon as they can, which presumably would be after the election,” Clinton said.

“They will probably have to put everything off until early next year,” he added. “That’s probably the best thing to do right now.”

Clinton made the unexpected endorsement of extending the Bush tax cuts but added that he is not in support of extending them for the wealthiest. This echoes the fundamental idea behind the Buffett Rule.

Clinton was also quick to blame Europe – saying “this European thing that’s having a bigger impact than people know” – and politics for the current economic mess.

“The thing that cost jobs here has been the Congress’s policies,” said Clinton.

For the Democratic Party, Clinton has been worrisome of late. Twice now he has publicly opposed U.S. President Barack Obama, while many Democrats still look to the former president for party leadership.

After the interview a statement was issued by Clinton’s office to “better explain” his comments to the public.

More Weak Reports Fuel Recession Talk
Debating about whether or not we are technically in a recession could escalate fears arising from several weak economic reports recently issued.

The U.S. Labor Department issued an awfully disappointing U.S. jobs report last week. Only 69,000 new jobs were added in May, less than half of the expected 150,000 jobs.

Coupled with the jobs numbers, the unemployment rate unexpectedly rose from 8.1% to 8.2% as job seekers returned to the workforce, the Labor Department report revealed.

To make matters worse, adjustments to previous months showed the economy gained fewer jobs in March and April than originally believed. March’s employment numbers were reduced by 11,000 jobs to total 143,000, while April’s dropped by 38,000 to total an awful 77,000.

On Wednesday the Labor Department released its Q1 productivity numbers which were disappointing as well. After an initial report cited a 0.5% decline, the Labor Department revised its numbers saying productivity declined 0.9% the past quarter.

Basically that means Americans are working more and producing less. And to top it off wage growth continues to trail inflation.

Adding up the recent jobs and productivity reports leave us with a pretty grim outlook for the state of the U.S. economy.