Sham Wow Budgeting
Research for Online Investors

by John Dalt

7/19/11

The market got some good news this morning with better than expected Building Permits and Housing Starts numbers.  Being oversold after seven sessions of weak trading it is natural to expect a snap back rally.  The market also seems to accept the increasing likelihood that the Eurozone leader’s meeting on Thursday will decide on a long term arrangement to extend rescues to faltering countries.  The U.S. Congress seems to be finding a way to avert a stalemate over increasing the debt ceiling.

The market is oversold and we can see a clear way out of the credit issues that have troubled the market since the end of April.  Earnings are helping us also.  Google (GOOG) reported great earnings last week.  JP Morgan (JPM) reported income up 16% over the second quarter of 2010.  Total revenue was also higher.  Financials have been one of the biggest drags on the market in the last eleven weeks.

Goldman Sachs (GS) reported earnings this morning; they were greeted with selling in the shares in the pre-market.  Revenue was down 18% from last year and 37% from the first quarter.  Profits were up over a year ago, but the company had taken special charges last year which lowered the second quarter’s earnings. Earnings of $1.05 billion or $1.05 per share were $0.42 per share below analyst’s estimates.

Bank of America (BAC) has been on the most disturbing downtrend of the big banks, setting new 52-week lows.  BAC entered an $8.5 billion settlement with investors last week.  This settlement was around mortgage backed securities (MBS) that were sold in Country Wide Financial.  BAC reported a loss this morning of $9.1 billion for the second quarter.

BAC set aside another $1.9 billion in the second quarter for litigation.  Total mortgage related charges in the second quarter were $20.7 billion.  Excluding charges for settlements and litigation the bank earned $3.7 billion.  Like GS, BAC’s revenue was down but much worse.  Revenue fell 54% in the second quarter coming in at $13.2 billion.  The company had total revenue of $29.1 billion in the second quarter in 2010.

Wells Fargo (WFC) saw their revenue in the second quarter drop 5%, but profits rose 30%.  Net income was $3.73 billion or $0.70 per share.  WFC was able to release $1 billion dollars from their loan loss reserve.

Citigroup (C) % earnings last Friday, and like WFC was able reduce their loan loss reserves.  The company transferred $2 billion dollars as bad loans fell 35% in the second quarter.  Citi reported second quarter earnings of $3.3 billion dollars or $1.09 per share on revenue of $20.6 billion.  This was a 24% increase over last year’s second quarter’s earnings of $2.7 billion.

Wells Fargo (WFC) has enjoyed strength on their earnings, while JPM has traded even since their earnings release.  Goldmans Sachs (GS), BAC and C are all getting taken to the woodshed.  We need these to turn around and head higher for any rally to have legs.

Larry Summers, the former White House adviser, may have done the eurozone a great service with his op-ed over the weekend.  It gives a way out of the difficulties facing the leaders of the eurozone countries.  Having bonds issued by each country guaranteed jointly and severally by all eurozone countries should give political cover to Germany and Finland.

Over lunch, President Obama called a hasty news conference to announce that a “Gang of Six” Senators had reached agreement on a package of spending cuts and revenue increases that he found agreeable.  The stock market popped higher.  Gold and silver dropped and crude oil went higher.

Most members of the House of Representatives have a healthy distrust of the Senate, and today offers another example of why.  You can read the Senate proposal.  A PDF file of the Senate proposal is accessible in this news article, Gang of Six Back Together-Trying to Score Debt Reduction Deal.  It is a sham, but allows the politicians an easy way out.  You could call it a “Sham-Wow.”

CSPAN is carrying debate this afternoon on the Cut, Cap and Balance legislation.  A vote is expected late this afternoon.  If the House can pass it, they should take a lesson from the democratic playbook.  I believe the event I am referring to occurred in 1988 under Speaker Jim Wright.  The House passed a budget bill that Senators said they could not pass and the President said he would veto.  After passing the bill, Speaker Wright adjourned the House and sent his members home.

His unstated message was clear, 'That is all we will do, take it or leave it.'  Can you imagine the howls if Speaker Boehner pulled this power move?

There will be many twists and turns in the next two weeks, don't think the market is going to leave you behind in a new bull run just yet.

The Mailbag:
Thanks for the concise info yesterday. Very helpful in trying to sort thru what I see via "talking heads" on cable. Your last point about knowing when to sell is my most difficult aspect of owning stocks.  It is very difficult to sell "winners" -- until they take that last big hit.—Long-Term Subscriber R.R.

John’s Reply:  I agree.  That is the reason we changed the Long-Term Portfolio to be more offensive in our selling with Target prices on all of our positions.  We put a sell discipline on any stock that reaches our Target price.  We have closed four positions in the last two weeks for an average profit of over 30%

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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