Tag Archives: WFC
Blue Chip Is The New Alpha – Seeking Alpha
Posted on 30. Jul, 2012 by Harvey Sax.
We loved this provocative article from Seeking Alpha, especially the quote from Alexander Graham Bell. We may be biased though as we are also long JPM,K,MSFT, INTC, MCD, PG and BP and the author, Stephen Perry, is interning for us this summer.
Blue Chip Is The New AlphaJuly 30, 2012 | 3 comments | includes: AAPL, ABT, CL, CVX, DD, GE, IBM, JNJ, JPM, KO, MCD, MDT, MMM, MRK, MSFT, PEP, PFE, PG, T, TGT, VZ, WFC, WMT, XOMIts been difficult to find alpha in a market that is so volatile and dependent on global macro events, but I think Ive found where its hiding out. Interest rates are reaching all time lows and much of the world is riddled with debt. Investors are fleeing from the stock market but, as Alexander Graham Bell once said; “When one door closes another door opens; but we so often look so long and so regretfully upon the closed door, that we do not see the ones which open for us.”
7 Stocks Billionaire Fund Managers Are Crazy About
Posted on 22. Mar, 2012 by Insider Monkey.
1. Apple (AAPL) is the most popular stock among billionaire fund managers. Nearly half of them had a large position in Apple at the end of December. Apple is also the most popular stock among “ordinary” millionaire hedge fund managers (see the 10 most popular stocks). The stock gained 45% this year as of March 16th. We have been extremely bullish about Apple since we started writing here at Trading Deck at the end of September. Apple was the most popular stock among hedge funds at the end of September as well. We have been telling you that technology stocks are extremely undervalued as a sector and Apple had single digit forward PE multiple at the time. Today we are still very optimistic about the stock. Its 2012 forward PE ratio is 13.5 which is still less than the market. This is a stock that is expected to increase its earnings by nearly 20% per year over the next 5 years. It should easily trade above $800 over the next couple of years. Ken Griffin had the largest position in Apple at the end of December.
2. Google (GOOG) is the second most popular stock among billionaire hedge fund managers. The stock had a disappointing performance so far in 2012, losing 3.2% as of March 16. We are optimistic about Google as well. The stock’s 2012 forward PE ratio is 17 which is more than 25% higher than that of Google’s. They have similar expected growth rates though. We think Google deserves a slight premium over Apple because it is less exposed to competition from other search engines. This is not a stock that will go up 50% this year but it should deliver healthy returns over the long run. Julian Robertson and his tiger cubs Stephen Mandel and Chase Coleman are the most bullish fund managers about Google. We should note that Chase Coleman has an excellent track record of picking winners in the internet space and he made more than $1 billion for his investors by betting on Facebook in its infancy (check out Chase Coleman’s other internet stocks).
3. El Paso Corp (EP) is the third most popular stock among billionaire hedge fund managers. Carl Icahn made a bundle in EP by investing more than a $1 billion before its merger with Kinder Morgan was announced. He had $1.9 billion invested in the stock at the end of December. The other fund managers were pursing El Paso as a merger arbitrage candidate. These stocks usually trade at a discount to their announced merger price because investors usually aren’t 100% certain that the merger will go through as planned. Billionaire hedge fund managers made 9.6% since the beginning of this year by correctly betting that El Paso – Kinder Morgan deal will go through.
4. News Corp (NWSA) is the fourth popular stock among billionaire hedge fund managers. When other investors were dumping News Corp shares because of the hacking scandal billionaire hedge fund managers were buying them. The stock recovered all of its loses last summer. It is also slightly outperforming the market this year. Paul Singer had the largest position in NWSA among the billionaires we are tracking.
5. Medco Health Solutions (MHS) is the fifth popular stock. This is also a merger arbitrage play. The stock returned 25.7% this year as of March 16. D. E. Shaw had more than $300 million invested in the stock.
6. Microsoft (MSFT) is the sixth most popular stock among billionaire hedge fund managers. Ken Fisher and David Einhorn had the largest stakes in the stock. Last May at the Ira Sohn Conference David Einhorn called for the resignation of Steve Ballmer and stated that Microsoft is significantly undervalued. The stock gained 38% since then (read the transcript of Einhorn’s presentation).
7. Wells Fargo (WFC) is the seventh most popular stock among billionaire fund managers. The stock’s 2012 gains are around 23.4%, ten percentage points more than the S&P 500 index. Warren Buffett has the largest stake in this banking giant at the end of December. There were 9 other billionaire fund managers with Wells Fargo positions.
Insider Monkey has 30 stocks in its Billionaire Hedge Fund Manager Index and these 30 stocks (see the entire list here) had an average return of more than 16% this year as of March 16. The top 7 stocks that we discussed above performed even better. Five of these seven stocks outperformed the market and they had an average return of 19.9%, vs. 12.3% for the SPY. It is too early to turn this into a trading strategy, but tracking this index is going to be more fun than tracking billionaires’ wealth every 15 minutes.
An ETF To Capitalize on Growth in Regional Banks
Posted on 19. Mar, 2012 by Wilensky.
Guest Post By: Benjamin Shepherd
Thus far, 2012 has been a great year for the money center banks; shares of Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) have all gained more than 30 percent year to date. Solid balance sheets, growing profits and a strengthening domestic economy have underscored the fact that, thanks to aggressive intervention by government and banking authorities at the peak of the financial crisis, American banks are now the strongest in the world.
According to the Federal Deposit Insurance Corporation’s (FDIC) most recent quarterly assessment of the banking industry, the sector posted its tenth consecutive year-over-year gain in quarterly net income, hitting $26.3 billion during the fourth quarter. That’s a better than 23 percent increase over the same period in 2010, as two out of every three banks reported improved net income numbers. Full-year net income also hit a five-year high in 2011, reaching $119.5 billion for an almost 40 percent increase over 2010.
An improving domestic economy has been a huge factor in the positive developments in the banking industry, with declining noncurrent loan balances and falling loan-loss provisions driving much of the sector’s gains. The industry set aside only $19.5 billion in loan-loss reserves in the fourth quarter, a more than 40 percent decline from the same period in 2010, as more than half of banks cut reserves. As loan-loss reserves are reduced, they’re essentially added back into revenue.
Meanwhile, loan books are once again growing, with loan balances up by $130.1 billion in the final quarter of 2011, a gain of 1.8 percent from a year ago. Commercial and industrial loan balances were up 4.9 percent in the quarter, credit card balances rose by 3.2 percent and residential mortgage loans bumped up 1.4 percent, as credit started to flow again.
Unfortunately, the report wasn’t all roses. Full-year operating revenue declined in 2011 versus the prior year, marking only the second year of declines since the FDIC began keeping data in 1938. Net interest income fell by 1.7 percent, as banks struggled to cope with a low-interest rate environment. But the biggest drag on revenue was a 2.3 percent decline in noninterest income, largely due to a 4 percent drop in fees generated through mortgage servicing operations and a 5.9 percent fall in service charges on customer accounts.
While mortgage loan balances are growing, overall activity still remains well below the pre-crisis peak. That will detract from bank revenues for years to come. At the same time, banks are beginning to cope with the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which, among other things, limits the fees banks can charge for things such as low account balances and bounced checks. Fee income has always been a major profit center for banks, so limits on charges create a significant earnings headwind.
But all of this news reinforces my bullish view on SPDR S&P Regional Banking ETF (NYSE: KRE).
The exchange-traded fund (ETF) holds a portfolio of 71 mostly smaller regional banks, with market capitalizations ranging from just $488.8 million to $31.3 billion and offers excellent stock diversification in a growing sector.
While the ETF’s portfolio holdings have a fairly wide range in terms of asset size, about half of them have total assets of less than $1 billion, which is the sleeve of banks in which we’re most interested.
The FDIC breaks its data out according to institution size, offering a decent snapshot of how small- and mid-sized banks perform relative to large money center institutions. The data show that while small banks are at a disadvantage to large banks in terms of their cost of funds–both interest and noninterest expense ratios are higher than at larger banks–they rate much higher in terms of efficiency and financial condition. For example, measures such as earning assets to total assets and tier 1 capital ratios tend to consistently run between 50 basis points and 300 points higher. They also tend to have higher net loans to asset ratios, which reflect the fact that their core business is making loans in their local markets. In other words, these are traditional banks.
While the big banks are clearly doing well for themselves, they’ve become so large and involved in so many business lines beyond simply taking deposits and making loans that they’re now in the crosshairs of the Dodd-Frank Act. Over the coming years, as more of the Dodd-Frank provisions come into force–assuming Congress doesn’t intervene in the meantime–big banks are going to find their profitability squeezed as they are forced to abandon investment banking activities such as proprietary trading and see more of their fee-collecting opportunities curtailed.
But because of specific exemptions built into the Dodd-Frank Act for institutions with less than $1 billion in assets, smaller banks won’t have to cope with the same amount of regulatory oversight. Beyond that, the majority of smaller banks don’t engage in the activities that are prohibited under Dodd-Frank anyway.
As a result, smaller banks will be able to continue building their businesses relatively unfettered by additional regulatory burdens, while, at the same time, they will face less competition from larger banks encroaching upon their areas of operation. In fact, national banks such as Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) are in the process of consolidating branches and pulling out of less profitable markets, offering smaller institutions the opportunity to pursue additional growth.
If you are DIY investor, check out Jim Fink’s article, How to Value Bank Stocks, for some excellent tips on selecting bank stocks.
10 Most Popular Stocks Among Hedge Funds
Posted on 29. Feb, 2012 by Insider Monkey.
Guest Post By: Insider Monkey
We have been tracking the most popular stocks among hedge funds for more than a year now. Hedge funds are known to be short-term oriented but when we look at the most popular stocks among hedge funds we see that they are focused on the long-term more than expected. Apple (AAPL) and Microsoft (MSFT) have been among the top three most popular stocks since at least the end of 2010 (see the 10 most popular stocks at the end of September). This is consistency and both stocks outperformed the market over the last year. For the past two quarters Google (GOOG) joined them. Even George Soros bet more than $150 million on the stock. We are bullish about Google as well. In fact mega-cap technology stocks are trading at very low forward price multiples compared to the market. Apple will probably make around $40 per share in 2012. The stock has more than $100 per share in net cash, so its 2012 price-earnings ratio is a paltry 10 excluding cash. This is a stock that is expected to increase its earnings by nearly 20% for the next 5 years. On the other hand utility stocks that are expected to grow at less than 5% annually have P/E ratios around 13-14.
Hedge funds’ message cannot be clearer. Technology stocks are undervalued and sooner or later the rest of the market will recognize this. Hedge funds are also buying mega-cap banks. Citigroup (C) is the most popular financial stock followed by Bank of America (BAC) and JP Morgan (JPM). Warren Buffett’s favorite Wells Fargo (WFC) is the fourth most popular bank and ranks ninth overall. Another stock that is trading at a ridiculously low multiple is David Einhorn’s favorite General Motors (GM). For the past 10 years hedge funds’ top 10 stock picks managed to beat the market by around 2 percentage points annually. It isn’t too much but it sure is better to buy these stocks in your IRA account than an index fund. Check out the rest of the list yourself. This list is based on the fourth quarter 13F filings of 375 hedge funds and prominent stock pickers followed by Insider Monkey. Here are the 10 most popular stocks among hedge funds:
1. Apple: 127 hedge funds, $16 billion
2. Google: 108 hedge funds, $10.9 billion
3. Microsoft: 95 hedge funds, $6 billion
4. Citigroup: 92 hedge funds, $4.8 billion
5. Bank of America: 85 hedge funds, $2.3 billion
6. General Motors: 80 hedge funds, $2.2 billion
7. JP Morgan: 79 hedge funds, $4.6 billion
8. Pfizer (PFE): 69 hedge funds, $3.5 billion
9. Wells Fargo: 68 hedge funds, $15.3 billion
10. Qualcomm (QCOM): 64 hedge funds, $4.1 billion
Pension Pulse: Hidden Burden of Ultra-Low Interest Rates?
Posted on 03. Feb, 2012 by Pension Pulse.
Guest Post By: Leo Kolivakis
via Pension Pulse: Hidden Burden of Ultra-Low Interest Rates?.
Matthew Philips and Dakin Campbell of Bloomberg report, Banks Join Pensions in Squeeze as Federal Reserve’s Low Rates Erode Profit:
The Federal Reserve, which cut its target for the federal funds rate to a zero-to-0.25 percent range on Dec. 16, 2008, said last month that rates would remain “exceptionally low” at least through late 2014. While the unprecedented period of near-zero rates is meant to aid an ailing economy, it poses challenges for banks, insurers, pension funds, and savers.
The hope is that by making mortgages and other loans cheaper, ultra-low rates eventually may revive economic growth, Bloomberg Businessweek reports in its Feb. 6 issue. For now they’re squeezing profits at banks and disrupting investment strategies at insurance companies and pension funds. They’ve reduced payouts on savings accounts and bonds, and may lead to higher bank fees and insurance premiums.
“For most people, there’s been more downside to these low rates than upside,” says Barry Ritholtz, chief executive officer of FusionIQ, a New York-based investment research firm. “They’ve punished savers and people living on fixed income, and made insurance more expensive.”
For banks, low rates provided a boost at first because they could borrow money cheaply and reduce rates paid to depositors while still collecting interest on existing loans made at higher rates.
As old loans matured, banks had to make new loans at lower rates, cutting into profit. At JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC), the four largest U.S. banks by assets, net interest margins — the difference between what they pay to borrow and what they earn on loans — dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.
‘Margin Compression’
“There’s no best way to counteract net interest margin compression,” says Betsy Graseck, a Morgan Stanley (MS)analyst. “You need to have several different strategies.”
Many banks have announced cost-cutting plans, including layoffs and lower compensation. Jason Goldberg, a Barclays Capital analyst, says larger banks are increasing fees on deposit accounts and slashing debit-card rewards programs.
“There are certainly a lot of levers they are pulling,” Goldberg says. “That said, it’s a big challenge. For a lot of these banks the majority of their profits comes from net interest income.”
Low rates also present a special challenge to insurers, which need safe, predictable investment returns to pay claims.About 64 percent of the property and casualty insurance industry’s portfolio is in high-grade corporate bonds. The average yield on investment-grade corporate bonds has fallen to 4.3 percent, from 6.2 percent in July 2007, according to data compiled by Bloomberg.
Insurance Losses
Insurers suffered $32.6 billion in losses from January through September 2011 in the wake of natural disasters including Hurricane Irene and tornadoes in the Midwest. To make sure they have cash available, insurers have begun moving some of their money into shorter-term bonds, says Steven N. Weisbart, chief economist at the Insurance Information Institute. Since shorter-term bonds have lower yields, that shift leads to a further squeeze on investment income.
Data through the third quarter indicates that industry profits were down 60 percent from the same period in 2010. Weisbart says that to make up for lost investment revenue some insurers may begin tightening underwriting standards and raising premiums.
Like insurers, pension funds have long counted on bonds to help them meet future obligations. After four years of low rates, and a decade of flat performance in the stock market, corporate pension funds face record shortfalls. A January report by Credit Suisse Group AG estimated that 97 percent of companies in the Standard & Poor’s 500 have underfunded pension plans.
‘Dispiriting Year’
The combined deficit at the 100 largest defined-benefit plans increased by $236.4 billion last year, according to an annual pension study by Milliman Inc., a Seattle-based actuarial and consulting firm.
“This was an unusually dispiriting year,” wrote John W. Ehrhardt, a co-author of the report. Depressed interest rates were responsible for 90 percent of the funding shortfall accrued since the middle of 2011, Ehrhardt says. “It’s all about having to cope with low rates right now.”
To address the shortfalls, companies have been making record levels of cash contributions to their pension funds over the past year. Boeing Co. (BA) recently announced that it would contribute $1.5 billion to its pension plan in 2012.
Traditionally, pension funds followed a simple allocation rule of thumb, investing 60 percent of their money in stocks and 40 percent in bonds, according to Ehrhardt.
‘More Sophisticated’
“That was the answer for many years,’” he says. “Things have gotten much more sophisticated.”
The biggest change over the past decade has been the position pension funds have begun taking in alternative investments. Between 2006 and 2010 they doubled their exposure to riskier investments — including real estate, private equity, and hedge funds – to 20 percent, according to Milliman.
Lately, pension funds have been trying to boost yields by buying bonds with longer maturities. By lengthening the average maturity of their bond portfolios by about six to eight years, funds have been able to get about two percentage points of extra yield, says Ari Jacobs, a pension specialist at consulting firm Aon Hewitt. That strategy carries its own dangers: When interest rates rise, the value of existing bonds falls–and longer- maturity bonds drop more than shorter-maturity ones.
“The traditional tools to manage a portfolio, like time horizon and diversification, have been thrown out the window,” says Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago. “All the lessons my generation has learned over our lifetime have been seriously called into question these last few years.”
Indeed, the ‘traditional tools’ to manage a portfolio, like time horizon and diversification, are not working as well as the past precisely because in an ultra-low interest rate environment, all asset classes are highly correlated.
The only real refuge from a shock in such an environment is government bonds. The article above blames the Fed for ultra-low rates but the reality is that the bond market still fears debt deflation, which is why rates remain at historic low levels. It’s not just ‘QE’, there remains a deep fear that the world is slipping into a debt-deflationary spiral.
How should pensions adapt in such an environment? Go back to read my comment on ATP, the world’s best pension/ hedge fund. I added insights from Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), the best pension plan in North America. Read his comments carefully. The folks at HOOPP and ATP get it.
What else will help pensions? The macro environment. This morning’s strong jobs report out of the U.S. crushed expectations. Stocks rallied and bond yields jumped on the news. While this is good for pensions, it won’t make enough of a difference to shore up severely underfunded pension plans.
Importantly, you need a significant jump in real yields and a huge boost in stocks and other risk assets to help close the huge deficits pensions have experienced in the last few years. But even that won’t be enough. We still need serious pension reform and a better approach to managing assets and liabilities at pension plans.
And don’t cry for banks, they always find ways to profit off money for nothing and risk for free. In an ultra-low interest rate environment, the name of the game remains trading, and the big banks are going to continue pushing hard on trading revenue from their capital markets operations. Fees from underwriting, IPOs and merger arb will also add to banks’ bottom line.
But what about savers, workers and many others trying to survive these volatile markets? They’re getting crushed because most of them do not enjoy the benefits of a defined-benefit pension plan. That is the real tragedy of our time, one that needs to be addressed by courageous politicians willing to make the case for boosting DB plans.
Finally, Fed Chairman Ben Bernanke says he won’t tolerate inflation to boost jobs, but I can assure you he’s doing everything in his power to counteract restrictive fiscal policy, reflate risk assets and stoke inflationary expectations. When it comes to deflation or inflation, the Fed prefers to err on the side of the latter, and so do pensions and financial institutions.
Below, Bloomberg excerpts from Bernanke’s testimony before the House Budget Committee on the U.S. economy, budget deficit and Fed monetary policy. Bernanke says the economy has shown signs of improvement while remaining vulnerable to shocks. Barring a collapse in Europe, the U.S. economy will continue to surprise to the upside for the remainder of the year.
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