Friday, January 29, 2010

Oh dear lord....WALL STREET 2, with Michael Douglas

Well this looks horrendous, except for the big 80's cellphone!

Avoiding the "commodity trap" at Apple (AAPL, DELL)

Dell will do $57billion in revenue this year. Apple will do about the same, on a calendar basis. Yet Apple's stock market value is $175billion, about 7times the market value that Dell has.

The reason? Margins. Dell's most recent quarter saw 17% gross margins while Apple's clocked in at 41%.

Below is a discussion of how Apple prevents its wares form being commoditized like Dell's. Oh and in full disclosure, I'm long Dell instead of Apple, thanks to Dell's juicy Free Cash Flow Yield.

Amazon beats handily, but free cash flow increase is of dubious quality (AMZN)

Amazon beat consensus earnings last night by about 15cents per share for the fourth quarter, and revenue of $9.5billion came in above the $9billion expected by the street.

Company-wide gross margin jumped .7% from a year ago to 20.8%, led by North America which jumped to 23.6% from 21.5% a year earlier. International gross margin dropped almost a percent, to 17.7%.

The analyst community, as usual with Amazon, is deliberating over how much of a premium the shares deserve to other stocks - a game that i have no idea how to play. Among analyst reactions, one guy that's not having a great morning is Hamed Khorsand of BWS financial. He upgraded the shares to STRONG BUY today. Not a BUY, but a STRONG BUY. This is coming off the SELL rating he stuck with since late July of last year. Hmmm, in (an attempted?) defense of his call, I note that he downgraded the stock back when its forward PE was about 42, and is upgrading it with the forward PE at about 36....hey i tried.

The company cited BIG operating and free cash flow, but it's important to note that a full $1billion of the company's $2.9billion in Free Cash Flow was due to extending accounts payable. More to the point, they extended it by an EXTRA billion compared to how much they pushed it out last year. I certainly won't scoff at this impressive working capital management, but it's often not sustainable to this degree, so it's best to adjust the free cash flow for investment decisions.

Copyright 2010 AlphaNinja

16 analysts WAY off on Chevron's q4 Revenue (CVX)

DJIA member Chevron Corp (CVX) reported "muddled" earnings this morning, but it looks like they beat expectations.

Revenue of $48billion came in 20% above the Street average estimate, and 8% above the street high estimate. I don't know how they were so off on that one...

At first glance, earnings of 1.53 per share look lighter than the 1.70 the Street was expecting, but after pulling out 20cents per share in charges, they came in ahead of expectations.

Refining margins were absolutely disastrous this quarter, as expected. For the fourth quarter, downstream (Refining, marketing and transportation) lost $613million, versus a profit of $2.08billion a year ago. Jaysus.

Despite that horrible number, CVX shares are positive today, up a little over half a percent. Investors might be betting that the 8% smack to the stock already this year is a bit much, and the 3.7% expected dividend yield doesn't hurt either...

Copyright 2010 AlphaNinja

Q4 2009 GDP +5.7% versus 4.7% expected. Markets like it.

US indexes are about about 75basis points each, on the heels of this morning's better-than-expected GDP report from the Bureau of Economic Analysis.

More than any other reason, a slowdown in inventory reduction was the reason for the big number.

Thursday, January 28, 2010

Greece continues to deny reality, hurtling toward default

In denial, Greece claims a conspiracy theory.

From Marketwatch:

DAVOS, Switzerland (MarketWatch) -- Greece has been targeted as a potential "weak link" within the euro zone, but remains determined to take painful steps needed to cut its budget deficit and cure a "credibility gap" over the nation's finances, Greek Prime Minister George Papandreou told the annual meeting of the World Economic Forum Thursday. "Often a country is being used as a weak link ... we are being targeted with an ulterior motive or agenda," he said. Greek government bonds were under pressure again Thursday amid worries over the country's budget problems. Papandreou said Greece would not leave the euro zone and that membership in the single currency has benefited the country

And the Chinese have balked at being the dumb money to the rescue:

China shouldn’t buy a “large chunk” of Greek government debt to help rescue the nation because the securities are more risky than U.S. Treasuries, said Yu Yongding, a former adviser to the Chinese central bank.
Greece has a lower debt rating than the U.S. and its statistics have been “sharply” criticized by the European Commission, said Yu, currently a member of the Chinese Academy of Social Sciences, a government-backed research body. The Greek Finance Ministry yesterday “categorically“ denied a report in the Financial Times that it is wooing China to buy as much as 25 billion euros ($35 billion) of its bonds.
“It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class,” Yu said in an e-mailed response to questions. “Let European governments and the European Central Bank rescue Greece.”
The cost to insure Greek bonds is soaring again today:

Amidst a sea of red, Amazon is up (AMZN, AAPL)

While the market is getting trounced today - especially tech shares - Amazon is a lonely positive name, trading +1.6%. It's likely due to yesterday's over-reaction to the Apple event, and partly in anticipation of big earnings results this afternoon.

Collins Stewart estimates that Amazon's kindle - the product under direct assault from Apple's new product offer - will amount to about a $1billion in revenue this year, and $250million in gross profit. Take the company average share of operating expenses applied to this gross profit, and I'd estimate Kindle-related earnings per share are about 10cents, out of 2010's full year estimate for 2.60 for Amazon. Small change, even if sales form Kindle evaporated completely.

Amazon reports tonight, we'll see if there is an inordinate amount of Q&A on this subject.

Markets down as durable goods orders disappoint. Tech orders especially weak.

US stocks are down today, with the DJIA off 1.5% and the Nasdaq off 2.4%. Apple's (AAPL) heavy weighting is hurting the tech indexes, as its shares are off 4% today, giving back yesterday afternoon's post-iPad gains.

Durable goods orders for December came in at +.3%, a far cry from the estimated +2%.

Especially weak were aircraft orders and computer-related orders, which might be why tech shares are off much more than other sectors today.

Grand Theft Taxpayer, Oregon edition

Oregon voters just made themselves possibly the least-friendly state in the country for new businesses to open up shop.

From the WSJ:

It's not often that citizens vote for higher taxes, but 54% of Oregonians have done precisely that. In a rolling month-long referendum by mail that ended Tuesday, they approved some $700 million in tax hikes on business and wealthy residents.

The teachers unions exulted yesterday that Oregonians voted to "protect our schools and vital public services." What was really protected was the $83,402 a year average in pay and benefits to Oregon state workers, 30% higher than what private workers receive. This is bankrupting states like Oregon, California, New York and New Jersey. On the other hand, Oregon's folly will be some other state's gain.

Crown Castle down 4% as focus shifts from debt schedule to valuation (CCI)

Communications tower-operator Crown Castle (CCI) is down 3.5% this morning, despite beating Street estimates on revenue and "earnings." That's in quotations because CCI doesn't "do" earnings due to massive depreciation and amortization expenses. The conference call is going on right now, and management is citing studies about the growth of smartphones and their "insatiable" appetite for bandwidth - bandwidth that must run on CCI's towers. The difficult thing with this company is reconciling the excellent growth prospects with the razor-thin margin of error they've left themselves with regard to debt payments and leverage ratio's. Crown Castle's cost of capital must be calculated to be around 8%, and their Free Cash Flow Yield is below that - even with taxes being a benefit instead of a provision (they don't pay taxes, but rather get a credit against future taxes).

Despite today's drop, CCI shares are up 16% since I called them overpriced on November 3rd. Right or wrong, always honest. I believe now as I did then that this is a leveraged finance company. They have beautiful cash flows, but are levered to the moon. The company's market value is $10.7billion and total debt outstanding is about $7billion.

Most important for this firm and its investors is the massive debt burden, and its maturity schedule. Less than a year ago, shares traded at levels suggesting a bankruptcy. In 2009, management did a masterful job in the debt markets, pushing off debt maturities and achieving a weighted average interest rate of 5.75%. The extension of maturities did come at a heavy cost, as q4 interest expense of $118.9million was an increase of 35%.

Looking at the q4 results, gross margin has improved by 1.6%. The firm's operating model is juicy, as the same rental site adds more and more tenants.

Capital expenditures were down 60% in 2009 versus 2008, and that's not a sustainable decline.

Look - CCI is in a marvelous business, but as I said above they are leveraged to the moon. If they actually paid taxes they would be dangerously close to breaking loan covenants. Not my cup of tea.

Copyright 2010 AlphaNinja

Wednesday, January 27, 2010

Apple blasting higher as iPad price point is much cheaper than expected (AAPL, AMZN)

After trading down most of the day, Apple just exploded higher when the $499 entry-level price for the 16gig Ipad tablet reader was announced - literally HUNDREDS of dollars cheaper than expected.

Putting this device within a couple hundred dollars of the competition is a huge deal. Why pay a little less for an Amazon kindle when for $100 more you get Apple's elegant design and impressive technical edge?

Apple shares just jumped to $208 from about $200 an hour ago, while Amazon shares are off $3 from their intraday high, as Apple's aggressive pricing will wage war on their successful Kindle.

This thing looks ridiculous. Briefing is updating from the presentation:

Apple iPad has youtube in HD, iTunes built in, maps application, Time magazine app
-Apple, at event Steve Jobs, shows that it can open up PDFs
-Apple, at event, shows iPad's maps app from GOOG, iPod functionality, new calender app
-Apple, at event, shows iPad has GPS, 9.7 in display, full capacitive multi-touch, 1 GHz Apple A4 chip, 16-64 GB flash storage
-Apple iPad has 10 hrs of battery life, over a month of standby battery, 802.11n wifi
-Apple iPad can run all iPhone apps
-Apple, at event, shows that iPad games use multi-touch gestures for gaming; NYT introduces custom app for device. NYT iPad app works like a e-reader with video
-Apple iPad uses iWork for spreadsheets, presentations, documents
-Apple iPad iWork apps are $9.99
-Apple's Steve Jobs says iPad has 3G; 2 plans -- 250 MB/month for $14.99, or unlimited for $29.99
-Apple all iPad 3G models are unlocked; cost starts at $499
-Apple iPad 16GB is $499, 32 GB $599, 64 GB $699, shipping in 60 days
-Apple iPad has a keyboard accessory avail that locks in

Copyright 2010 AlphaNinja

Dissension in the ranks, the market tanks (I'm a poet!)

The Federal Open Market Committee (FOMC) meeting minutes were released a couple minutes ago, sending the market sharply lower.

Nothing about the commentary was terribly surprising.  They cited improvement in the direction of the economy, and said that the fed funds rate would remain at 0-.25% for the foreseeable future.

What's got the market nervous about sooner-than-expected raise increases is that unlike the December minutes, this time there was a dissenter:

"Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

Desperate for cash, Athens hunts for the dumb money

Don't do it Beijing!

The Financial Times is reporting that Greece has tapped Goldman Sachs to sell about 25billion (Euro) of bonds, hopefully to China.

"Greece is wooing China to buy up to €25bn of government bonds, a move that underlines Beijing’s growing financial power, as it struggles to fund soaring public debt ."

And that's just how it will go. Greek and Goldman officials will slobber over the Chinese, telling them what a "powerhouse they are," when in the end they're looking for someone to buy garbage that no one else wants.

The debt might be priced at 6.4% on ten-year notes, only about 3% more yield than US treasuries of the same duration. That, despite the chance of Greece defaulting on its debt being about 15times higher than the US:

Copyright 2010

Caterpillar beats earnings estimates, but 2010 outlook is weak (CAT)

CAT posted earnings per share of 41cents for the fourth quarter, handily beating the consensus estimate of 28cents. Revenues came in about $200million below the $8.1billion the Street was looking for.

For 2010, CAT estimates earnings of 2.50 per share, a bit below the Street average estimate of 2.70. Revenue guidance is a range of +10% to +25% versus 2009's $32.4billion - so a midpoint of $38billion versus the street estimate of $36billion. That 10-25% increase in revenue is being scoffed at this morning, part of the reason shares are down 6%.

I'm on the conference call right now, will update this model later today. But here's a quick look at earnings and Free Cash Flow scenarios for CAT over the next few years. I'm generous on gross margin and many other metrics. Management's 2012 call for $60million in revenue, if they actually got there, would probably lead to a double in the stock price. I think the revenue numbers here are wildly optimistic, but I'll share them in a "upside" look:

In q4, CAT was still able to handily cover its interest payments, to the tune of about 7.5times.

Looking at 2009, the numbers show what a massively leveraged company CAT is. They held the line on gross margin well, as it actually increased by 1%. But sales fluctuations can KILL this company, as their largely fixed cost nature (operating costs of $7.9billion vs $8.5billion the previous year) is susceptible to wild fluctuations in sales. :Last year's $12.9billion in Gross Profit easily covered operating expenses, but in 2009 that gross profit dropped by $4.4billion while operating expenses fell only $540million. Dangerous...

Among reasons why the EPS outlook isn't better, the company cites a higher tax rate and an unfavorable product mix (higher % of lower margin sales). From the prepared Q&A:

CAT cites an uptick already in aftermarket service parts and sees this as an indicator of growing demand...but it also must be seen as an indicator of "fix-it versus buy-a-new-one" mentality.

Below is from the company's earnings presentation comparing 2009 operating income to 2008. The red bars show negative drags on operating margin, while the green shows positive impacts. CAT's focus on procurement, manufacturing efficiencies and reductions in headcount could lead to a springboard effect if sales turn around.

I wouldn't touch the shares here. Sure, if management hits the $60billion revenue mark in 2012 they will have proved the naysayers wrong. But a more rational look at earnings possibilities over the next couple years leaves the shares more than fully valued at current levels.

Copyright 2010 AlphaNinja

Tuesday, January 26, 2010

Livestock-raters get their lawsuit dismissed! (MHP, MCO)

Awww, good for them. Bloomberg is reporting that S&P and Moody's have won dismissal of a lawsuit:

"Standard & Poor’s and Moody’s Corp. won dismissal of a lawsuit seeking to hold them responsible for defrauding investors who bought about $100 billion of mortgage- backed securities.
At a hearing today, U.S. District Judge Lewis Kaplan in New York said he would dismiss claims against the rating companies, according to a clerk for the judge.Lehman Brothers Holdings Inc., which was alleged to have once owned the bonds that were sold, is bankrupt and not a defendant in the case.
“We are pleased the judge granted our motion,” Chris Atkins, a spokesman for S&P, a unit of McGraw-Hill Cos., said in an interview. Michael Adler, a spokesman for New York-based Moody’s, didn’t immediately return a call.
Investors in the mortgage-backed securities claimed in their lawsuit that S&P and Moody’s misled them by disregarding ratings guidelines, serving conflicting roles in evaluating and structuring the bonds, and sacrificing their independence."

Why do I call them "livestock-raters?" Because they said so themselves. From a text conversation between two S&P officials:
S&P Official #1: Btw (by the way) that deal is ridiculous.
S&P Official #2: I know right...model def (definitely) does not capture half the risk.
S&P Official #1: We should not be rating it.
S&P Official #2: We rate every deal.
It could be structured by cows and we would rate it.

A good description of the ratings business is described by David Einhorn, who is (or was in May09) short MCO:
"If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have a problem...The truth is that nobody I know buys or uses Moody's credit ratings because they believe in the brand. They use it because it is part of a government created oligopoly and, often, because they are required to by law...The real value of Moody's lies in its ability to cow the authorities into preserving its status."

(note to regular AlphaNinja readers - NO, I will not soon tire of posting this pic!)

Copyright 2010 AlphaNinja

And yet more turmoil for Parlux...(PARL)

Parlux Fragrances (PARL) just announced that the CEO is leaving and that they had to "erase" some revenue.  Nice.

FORT LAUDERDALE, Fla., Jan. 26, 2010 (GLOBE NEWSWIRE) -- Parlux Fragrances, Inc. (Nasdaq:PARL - News) announced today that Mr. Neil J. Katz has resigned from his position as Chairman and Chief Executive Officer of the Company due to philosophical differences regarding the future direction of the Company.  Mr. Katz had held this position since July 2007, and has been instrumental in acquiring a number of new licenses during this period. Mr. Katz, who is expected to remain with the Company as a Director and consultant, stated, "A number of opportunities have arisen which require my attention.  Parlux is a fine company, and I anticipate being able to assist the Company during this transition and in the future." 

The Company also anticipates reporting its earnings for the three and nine months ended December 31, 2009 on February 3rd, 2010. The Company notes larger than expected product returns from U.S. department store customers have reduced the Company's net sales for the third quarter ended December 31, 2009 to approximately $50 million from the previously announced estimate of $52 million, and it expects to report a net loss for that quarter of approximately $5 million."

They're also seeing the end of their GUESS? license, which will hit revenue:

Now EVERYONE will invest with Warren (BRK.B)

Just a couple minutes ago, it was announced that Berkshire Hathaway B shares (BRK.B) will be added to the S&P500 index, a move Warren Buffett didn't deny was coming when interviewed a few days ago on CNBC.

And what shall Berkshire Hathaway replace in the index?  Why, Burlington Northern (BNI), which is being  acquired by Berkshire Hathaway.

Bad day for Carfax, good for you and I

Ouch.  Good for taxpayers, bad for Carfax.  They charge $35 for a 1-car vehicle history report, but are about to be undercut to the tune of 86% thanks to the National Motor Vehicle Title Information System.

This is intended to be a federal funded site, though it originated through consumer protection legislation.  It will be funded by the $5 user fees and its currently administered by the Justice Department.

Johnson & Johnson sees first annual sales decline in 76 years... (JNJ)

But fourth quarter revenue did increase from the year-ago period.

JNJ is facing challenges on multiple fronts. It's prescription drug business continues to face challenges from generic competition, and this will only get worse if the president gets his way on shortening patent protection timeframes. The company is also not immune to the weak economy, as elective surgeries see a decline, and their consumer division is challenged by trade-downs to private label products. Everything from contact lens sales to diabetes-test strips are under pressure, as more and more healthcare items become "discretionary."

Gross margin took a hit in the quarter, but the company made most of that back by reducing SG&A costs:

On thing I like right off the bat from their earnings presentation is the comparison of their original guidance to actual 2009 results - they came in VERY accurate on their predictions, giving us confidence in future guidance.

In their outlook, JNJ sees global healthcare spending increasing about 5.4% annually between now and 2014 with 2014 worldwide spending of $6.8trillion. International results have been very strong, as healthcare coverage in the developing world expands at a rapid pace:

2010 Free Cash Flow Yield, based on by FCF estimate of about $13.8billion, is a FAT JUICY 8.6%. The denominator I use is Market Value - Cash, causing people to wonder why I net out cash but don't add back debt. I exclude debt because if you bought the company and assumed the debt, they still earn 53times their quarterly interest payments.

That 8.6% Free Cash Flow Yield is far too rich for a company like this, despite clear headwinds. So what's an appropriate yield? I'll look to their debt, with full knowledge that it's overpriced. JNJ's
2029 6.95% notes are trading at 123cents on the dollar, to yield 5%. I think a Free Cash Flow Yield (FCFY) is easily fair for this company, suggesting a stock price of $75 a share once cash is added back. That's a 20% gain and only a Price-to-Earnings ratio of 14 for a world class company. Stocks like this are why I see bigger gains ahead for the DJIA.

Copyright 2010 AlphaNinja

Tuesday Morning (TRV, JNJ, VZ)

After a weak start, the DJIA is up about half a percent.

Several Dow30 components have reported earnings. Johnson & Johnson (JNJ) shares are down but rebounding, after beating EPS expectations by 5cents. The weakness in shares is likely due to tepid 2010 guidance, which disappointed some investors.

Dow30 member Travelers (TRV) beat BIG, with q4 earnings of 2.12 per share versus the street expectation of 1.49. Says the firm, ""Our retention rates remained high and the impact of renewal rate changes on premiums remained positive across all three of our business segments. This pricing dynamic is generally better than recent industry surveys."

The weakest DJIA member is Verizon, off 2.6% despite a generally in-line quarter. Investors may be unexcited about the necessity of continued massive CAPEX, and the potential for margin destruction when the firm offers its customers the iPhone.

A S&P500 sector heatmap, from Finviz:

Copyright 2010 AlphaNinja

Monday, January 25, 2010

BIG earnings beat by Apple (AAPL)

Apple beat the HELL out of estimates a few minutes ago. People might confuse the magnitude of the earnings beat, due to the revenue recognition rule changes I discussed back in September. But it remains the case that this is a big, big beat. Shares are up about four dollars in late trading.

In a just-released filing, Apple (AAPL) reported Q1 (Dec 26th was the end of their fiscal first quarter) earnings per share of $3.67 versus the street expectation of $2.07. What is truly ridiculous is that of THIRTY EIGHT wall street analysts covering the stock, the high estimate was still a dollar less than what they reported. Even more insane is that revenue of $15.7billion beat the street high estimate by about $3BILLION dollars. Truly remarkable.

I took a look at Apple in early December in a piece titled "2 and 4, the most important numbers when looking at Apple." I said shares were headed higher, in part due to expected earnings beats like this one.

Gross margin improved 3% as a percent of sales, while operating expenses dropped from 11.8 to 10.8%. Apple sold 3.36million Mac computers, a 33% UNIT increase from a year ago. (WOW) iPhone sales increased 100% on a unit basis and iPod units sold declined 8% (as must be expected, with iphones cannibalizing sales)

Tomorrow, Wall Street will trip over itself upgrading the stock. Notably, the forward guidance is above expectations, probably catching many by surprise. The tendency is for Apple to give conservative guidance that they can easily beat - but in this instance that conservative "easily-topped" guidance is already above where the street is.

So what are the shares worth? I'd say the shares will easily hit the mid 200's this year, as it would imply a mid-teens multiple + cash balance. Using a 2010 estimate for Free Cash Flow Yield of 5% and adding in cash would get me to about $230 per share, but with upside potential from new products and the ever increasing desktop market share Apple is grabbing, this stock could command even better valuation levels. Either way, color me extremely impressed by this performance.

Copyright 2010 AlphaNinja

Interesting perspective on bank activities

Peter Wallison of the American Enterprise Institute has a great take on the activities of banks, and why the government has had a role in limiting their opportunities.

As small regional banks have virtually NO chance of landing advisory or capital-raising fees from companies in need of said capital, they have nowhere to go but real estate lending:

"Banks have been committing themselves increasingly to financing real estate. The reason for this is simple. Because they cannot underwrite or deal in securities, they have been losing out to securities firms in financing public companies—that is, most of American business other than small business. It is less expensive for a company to issue notes, bonds or commercial paper in the securities markets than to borrow from a bank.

Where, then, can banks find borrowers? The answer, unfortunately, is commercial and residential real estate.

Real-estate loans rose to 55% of all bank loans in 2008 from less than 25% in 1965. These loans will continue to rise in the future, because only real-estate, small business and consumer lending are now accessible activities for banks.

This is not a good trend, because the real-estate sector is highly cyclical and volatile. It was, indeed, the vast number of subprime and other risky mortgages in our financial system that caused the weakness of the banks and the financial crisis. Requiring banks to continue to lend to real estate, because they have few other alternatives, virtually guarantees another banking crisis in the future."

Copyright 2010 AlphaNinja

LiveNation, Ticketmaster +11% as deal gets DOJ approval (TKTM,LYV)

CNBC is reporting that the Department of Justice has approved the merger between Ticketmaster(TKTM) and LiveNation (LYV), sending TKTM and LYV higher:

The most vocal opponent to the deal was competitor Anschultz Entertainment Group, whose CEO said last year that the deal was "not good for the industry." In an attempt to secure DOJ approval, it appears that last week LiveNation was offering Anschultz some of its locations in order to gain favor. It's not clear if any assets changed hands yet, but the
NYPost suggested that Anshcultz was cleverly trying to pick up assets on the cheap. Nice move if that's true.

Copyright 2010 AlphaNinja

Monday Morning (CAT,GE,WMT)

US indexes are positive this morning, with the DJIA +46points or +.46%.

Not much news behind today's gains, but rather a bit of recovery after last week's harsh selling. General Electric(GE) and Caterpillar(CAT) are the DJIA's biggest gainers.

GE estimates were raise at UBS this morning, as the firm sees improving results in Capital Finance. Goldman Sachs is also out with positive comments on GE today, saying earnings will increase thanks to lower tax rates and improving industrial results.

Wal-Mart (WMT) is in the news this morning, after a weekend announcement that they'll lay off 11,000 people. The headline news is not nearly as bad as it sounds on the job front, as most of these positions in food demonstration will be outsourced to Shopper Events, who if they were publicly traded would likely be up massively today.

Copyright 2010 AlphaNinja

Friday, January 22, 2010

Bank stocks probably over-reacting to headline worries (GS, MS, JPM, C,BAC)

Bank stocks are off nearly 10% in just a couple days, taking a cue from President Obama's new threats to reign in activities at the largest US institutions.

After a major setback to his agenda in the Tuesday senatorial election in Massachusetts, the President went looking to pick a fight - his words, not mine:

''My message to leaders in the financial industry is to work with us, not against us,'' he said. ''If these folks want a fight, it's a fight I am ready to have.''

The finer points of the administration's plan will - like healthcare, like the stimulus - be figured out by someone else, but in general the idea is to restrict the investing and trading activities of banks that access the Fed discount window or rely on FDIC insurance, etc.  Again, these are "best-guess" estimates, as the details have yet to be determined.  Some are rightly pointing out that actions like this might not have prevented the financial sector meltdown anyway.  Bear Stearns, for example, wasn't accessing the Fed discount window or enjoying FDIC backing - they just bought a LOT of garbage.

The biggest worry is the possibility that "proprietary trading" will be curbed, and the main target here would be Goldman Sachs.  The estimate being thrown around is that principal trading accounts for 10% of revenue for Goldman, and probably a much higher % of net income.  Principal investments at other banks are likely closer to 2-4%, so the potential legislation will not be a serious hit to earnings.  Even Goldman has downplayed the impact on their earnings:

"I would say pure walled-off proprietary-trading businesses at Goldman Sachs are not very big in the context of the firm," David A. Viniar, the firm's chief financial officer, said in a conference call.

Some of the attempts to reign in risk-taking seem completely appropriate, as the administration said these steps were "in the spirit of Glass-Steagall," the former rule preventing commercial banks from engaging in most securities trading.  While people (myself included) applaud that effort, they also wonder whether this President is qualified to implement a truly massive re-order of the banking landscape, given his previous views of the financial industry and the private sector in general.  Writing in his book Dreams From My Father, Obama referred to his brief stint on Wall Street (a job he reluctantly took), as being "like a spy behind enemy lines":

Bank stock shareholders should take comfort that everyone from Geithner to Bloomberg to Barney Frank are coming out against this new attack on banks.  And even if some sort of new restrictions on bank involvement in private equity or principal transactions is enacted, the negative effect to earnings will be very small.