ANZ to Cut Dividend 25%

It was just a year when I first asked the question Time To Buy The Big 4? My answer at the time was no. Then 6 months later I offered that it still wasn't time to buy banks.

I say this not to boast. but to point out that, what was said then still applies now. That is, in a weakening economic environment where credit growth slows and bad debts are on the rise, bank earnings will weaken.

Today ANZ was the first Australian Major Bank to announce that they are cutting their dividend (although CBA has alluded to doing as much). The company said that dividends for 2009 would be cut by approximately 25%. Michael Pascoe has this to say in the smh:

So the market knows what's happening in Australian banking and the ANZ's highly paid CEO does not. That's the kind reading of Mike Smith's announcement of a 25% cut in the bank's dividend.

In this space on November 19, I translated the banks' share prices thus:
The market is telling the CEOs: ''You're wrong. You don't know how to run a bank. You think Australia is going to have a soft landing when it's really going to crash. You're incompetent or you're lying and you'll cut your dividends.''

This was the month after the CEOs placed their hands on their hearts and more or less said they wouldn't be cutting dividends as the scrambled to raise capital. Here's part of the transcript from Smith's post-profit analyst briefing on October 25:

Mike Smith: I felt the market just would not accept a dividend cut right now and I didn't think we needed it right now. The issue is, what are the alternative means of raising capital in the future, so it's a bit of a balancing act. What I'm hoping is that the market will move and/or there will be opportunity to do other things.

Analyst: Won't you have to cut the dividend in the future?

Mike Smith: No.

There were similar conversations with the other banks, but the November 19 article focussed on Westpac and ANZ as they respectively represented the market's first- and fourth- rated banks.

On October 30, not only was Gail Kelly boasting about having just increased the divy, but she waxed lyrical about maintaining that trajectory of higher dividends.

It was amazing stuff and the market simply didn't believe either of them. In the ANZ's case at least, we know the market was right.

Misled or mishap

So the question then arises: was Smith attempting to mislead the market or simply incompetent in not being able to adequately assess his bank's outlook when the entire investment community could.

If it was the first, he should of course be sacked immediately. If it's the second, it doesn't inspire much confidence in his leadership. A pay cut matching the dividend reduction - 25% - would seem entirely appropriate.

Can't disagree with that. The market has been well ahead of the CEO's of Australian banks. In addition to the dividend cut, ANZ announced that their provision for bad debts is set to rise by about $500m from last year to approximately $2.4 - $2.5 billion and that they would be taking a mark to mark charge of approximately $370m on what they call "credit intermediation trades" which I'm guessing is another name for stupid bets on credit default swaps.

So who's next is the question, CBA has already hinted that they will be cutting their dividend, surely NAB's is on the chopping block as well? It's been the right call to bet against the banks for last 18 months and given the current outlook, I see no reason to change that view.

REF 1H09 Earnings Drop Cuts Dividend

As indicated in their profit warning, REF recorded 1H09 NPAT of $7.9m a -22% drop from the previous year. The company put the decline in earnings down to a fall in call volumes in both Australia and the U.K as well as increased marketing expenses and start up costs for the Irish operations. A strong AUD/GBP didn't help much either.

The company also announced a $0.09 fully franked dividend. For anyone buying at today's price that represents a more than 9% yield for the half year. However, that dividend is unlikely to be maintained as they continue to pay out more than they earn.

A couple of concerns about REF's health should be noted. The company previously was debt free. On a net basis (cash minus debt) that is still the case. However short term debt has increased to $4.1m. Why is that? Well, when you are paying out significantly more in dividends than you are generating in free cashflow you need to get it from somewhere.

Dividends are paid out in the subsequent period after profits are made. Thus REF paid out $11.1m in dividends in 1H09 whilst only making $7.9m. Thus the rate the company is generating free cashflow is not keeping up with cash needed to cover the divivdend and thus they need to borroiw to cover the shortfall. Clearly this is unsustainable as retained profits are depleting and debt levles grow larger.

The company described the drop off in call volumes as a dip. What does that mean exactly? It dipped and has now stabilized or are volumes still on the decline? The company is stepping a marketing campaign in both Australia and the UK in the next couple of months, however it is not clear if earnings will hold up at current levels.

Clearly I have been too optimistic on the company's earnings outlook. The question now is what is a sustainable level of earnings and thus dividends for REF going forward?

For 2009, I am assuming full year NPAT of $15m, with the second half showing more weakness. However into FY10, to be conservativeI'll assume earnings fall to $12m. for the full year. I'll also assume the the company does not continue paying out more than it earns. The company could at that time pay out $0.12 per share in dividends for the full year. Based on today's prices that represents a yield of slightly more than 12.0%. Much better than any bank is offering.

Still, the economic performance of the business is deteriorating and I would like to get some assurances from management that call volumes are showing signs of stabilising and that they don't intend to rack up more debt just to continue paying out an unsustainably high dividend. I will be followiung up with management on these issues in the enar future.

PWK 1H09 NPAT Up 57%, Another Capital Raising

Pipe Networks (PWK) recorded a rise in 1H09 NPAT of 57.1% from the previous year to $5.5m, eps rose 41%. The domestic Australian business continues to perform strongly with growth across all business sectors.

Also announced was a share placement of 3.5m shares at a price of $2.80 to raise $9.8m. In addition, details of a share purchase plan for existing shareholders was released whereby existing shareholders would be eligible to subscribe for up to $10,000 worth of new shares prices at $2.80.

According to the latest Annual report there are about 2200 shareholders, so if we assume most, say 2000 of them subscribe, that would raise an additional $20m. So altogether we have an additional $30m or about 10.6m shares. That is about 20% of the current share capital of the company.

That of course means quite a big dilution for current shareholders. Analysts will need to cut their earnings forecasts from current consensus of about 22.0 cps to 20.0 cps for FY09. By pumping in new capital you reduce the overall return on equity and thus the value of the business. Based on Profit forecasts for FY09 and FY10 I value PWK at approximately $2.60.

Of course PWK is undertaking a massive project for a small company by building the undersea cable PPC-1 and it has to be paid for somehow. Raising capital in the short term drives down overall returns on capital and thus the value of the shares.

Thus for long term investors making an investment today, they have to believe that future returns on capital will increase once the cable is paid for and fully operational. Given the potential of PPC-1 I believe that to be the case.

Also in the capital raising announcement The company outlined how they intend to pay for the rest of the PPC-1 project and it appears that sales from PPC-1 are expected to cover it and thus no more additional capital needs to be raised.

That would be good news for investors because at the end of the day, you want to invest in businesses that can manage above average rates of organic growth without the need for continual infusions of capital to support that growth.

JBH Posts Strong 1H09 Results But Where to Now?

JB Hi-fi Limited (JBH) reported strong 1H09 results despite a tougher retail environment. NPAT was up41% on the prior years result and the dividend was raised by 50%. Other encouraging signs were that gross margins held up and the company paid down $55m in debt from $125m - $75m whilst building cash reserves to $90m. Thus on a net basis the company is debt free.

Looking ahead the company affirmed it's previously announced guidance of 28% sales growth or approximately $2.35 billion. At the time of company AGM's in November last year, JBH sounded the most optimistic of the retailers and that point of view has been vindicated.

However, the question is how well JBH will continue to do in an environment of declining business and consumer confidence. The Rudd stimulus plan should keep consumers spending through the end of fiscal 2009 but the outlook from there remains uncertain.

My take is that the Australian economy will have another leg down in the second half of calendar year 2009 along with the rest of the world as the realization that there will be no second half recovery sets in. After a more than 50% rally off the November lows, JBH stock is not looking particularly cheap. at current levels.

Writedowns Another Name for Mistakes

"Restructuring, that's a word for mistakes" - Warren Buffet

Yesterday BHP reported a -56% decline in half year profits because of approximately $3.5 billion in writedowns. Call them writedowns, abnormals unusual items or whatever other name management manufactures, the fact is, such charges are admissions of prior mistakes. Brian McNiven in his book MARKET WISE put it like this;

Evidence of false profit declarations in previous years becomes apparent when a company announces significant asset revaluations. Write-offs and write-downs that quite obviously cannot be entirely attributed to the current accounting period are due to a lack of adequate provisioning in earlier years. When deferred provisions of this nature are labelled as restructuring, rationalisation, abnormals, non-recurring costs or non-operating costs - so as to give the impression that they are not part of the normal cost or risk of running the business - management is attempting to camouflage accounting oversights or misrepresentation.

You should not give companies a pass because a write-off is claimed to be a one-off. Before investing in such companies you should have a good look at the details of such writedowns, mining companies are notorious for such practices. There will be plenty of opportunity to scrutinize the nature of writedowns as companies will be reporting a slew of them this earnings season.

MQG Warns on Profit

Macquarie pre-announced earnings today citing further writedowns and forecasting a full year result which takes the company back to profit levels last seen in 2005. From the announcement:

• Currently anticipate FY09 profit being approximately $0.9b after allowing for an additional $900m in writedowns and impairment charges for the second half (after $1.1b of writedowns and impairment charges in the first half)
  

• Operating income (before impairments) is expected to be down 15%

• Outlook remains subject to significant swing factors including market conditions, asset realisations, completion rate of transactions and asset prices

The important point is that MQG has a business model that thrives in an environment of cheap credit and rising asset prices but that suffers enormously in an environment of deflating asset prices and tighter access to funding.

This is not a temporary blip for MQG, their profits this year will be half their record earnings of last year. It is doubtful that MQG can return to that record level of profitability for some years to come, a statement that you can make about all the major Australian banks and insurance companies.

Bye Bye Babcock & Brown Shareholders

With Babcock and Brown's announcement Friday morning, shareholders have effectively been wiped out. Here is the money quote from the announcement:

Consistent with the announcement on 7 January 2009 regarding the Company’s negative net asset position at 31 December 2008, the Board believes that in the current market environment and based on continuing discussions with the banking syndicate there will be no value for equity holders under the revised business plan and balance sheet restructure of Babcock & Brown International Pty Ltd and negligible or no value for holders of the Company’s subordinated notes.

So that's it for BNB shareholders, thanks for coming. BNB was the poster child for the leverage your way to prosperity model that has all but vanished. This was a smoke and mirrors operation that thrived on the near limitless access to cheap credit and the false assumption that asset prices always go up.

Macquarie Bank has actually been doing the same thing for longer, however they have a much stronger capital postion, lower leverage and a better ability to service their debt obligations through a more diversified revenue base. However it is difficult to see how a bank like MQG will prosper unless they radically alter the way they do business. goign forward.

An Unprecented Age of Financial Idiocy

Seriously, could you possibly get a more incompetent gaggle of fools running major US financial corporations? The denial, obfuscation and outright lies that have continually been offered up in defense of continuing losses and write-offs have reached comical proportions.

Anyone with a clue, knew that Bank of America clearly paid too much for Countrywide and Merril Lynch. Countrywide was a disaster teetering on the brink of bankruptcy when B of A bought it. However Merril is an even more monumental blunder, given the terms of the government rescue announced today. We now know that Merril was not worth even a tenth of the $29 per share price tag B of A paid.

Much has been said about Ken Lewis, the CEO of B of A as being one of the best CEO's on Wall Street, that doesn't say much for the rest of them. Lewis' blunders in the last 12 months demonstrate that he is at best completely and utterly incompetent.

Whilst Vikram Pandit is not responsible the postion that Citigroup now finds itself. The fact that he has continually defended Citi's financial supermarket model only to turn around and start splitting up the company because it is insolvent proves that he had no idea what he was doing.

So now today the stockmarket is celebrating because the US government has made the biggest US bank a ward of the state alongside Citigroup. It makes you wonder who is stupider, the CEO's on Wall Street or stock market traders. This article siums up the sorry state of the situation, from marketwatch.com:

Government giving $20 billion to Bank of America
Guaranteeing losses on over $400 billion worth of Citi, Bank of America assets

The U.S. government on Friday announced it was injecting $20 billion into Bank of America and guaranteeing losses on over $400 billion of assets both from Citigroup and the Charlotte, N.C. lender.

In a statement released Friday, the Treasury Department and the Federal Deposit Insurance Corporation said they will invest $20 billion in Bank of America (BAC) from the Troubled Assets Relief Program in exchange for preferred stock paying an 8% dividend.

The government also will provide Bank of America protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans and other such assets, which have been marked to current value.

Bank of America will absorb the first $10 billion of losses while the government will share losses from there, up to $10 billion. If that pool of assets sees losses of over $20 billion, then the government will absorb hits on 90% of them.

A similar guarantee was provided to Citigroup: Uncle Sam is on the hook for $301 billion of assets, with Citi (C) taking the first $39.5 billion of hits, and then the government absorbing 90% of the rest.

The Federal Reserve also is ready to backstop "residual risk in the asset pool" if necessary.

The government relief comes as Bank of America stock skidded to a 17-year low, following Thursday's report in The Wall Street Journal that such a relief program was near. Investors were unnerved by the additional losses at Merrill Lynch.

Both Bank of America and Citigroup (C) detailed billions of dollars during the fourth quarter, and that doesn't even include the estimated $15 billion of losses from Merrill Lynch.

Indigestion problems for Bank of America

I expended a lot of time criticizing B of A for their acquisition of Countrywide almost 16 months ago. In fact I have been critical of every one of these major takeovers such as JP Morgan's purchase of Bear Stearns and Washington Mutual.

The problem with these acquisitions is not that there are not some valuable assets up for grabs, it is that they simply paid too much for them. Every quarter, we learn that the value of assets on the major banks balance sheets are not what they were worth just one quarter ago.

Thus whatever the acquiring banks thought was fair value to pay for these assets turned out not to be. So is it any wonder that B of A is now balking at the Merril acquisition? From Bloomberg:

Bank of America May Receive U.S. Aid for Merrill Lynch Purchase
Bank of America Corp., the biggest U.S. bank by assets, may get more aid from the government to help absorb losses tied to this month’s acquisition of Merrill Lynch & Co., three people familiar with the matter said.

Details are likely to be disclosed on Jan. 20, the people said. That’s when Bank of America may post its first quarterly loss in 17 years as it digests the purchases of Merrill Lynch and Countrywide Financial Corp. The combined company has already received $25 billion from the U.S.

Bank of America, based in Charlotte, North Carolina, told regulators in December the takeover might be abandoned because of Merrill’s worse-than-expected results, said the people, who declined to be identified because the talks are private. The government insisted the transaction go forward because its collapse would create new turmoil in the financial system, they said.

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”

The part in bold is the point here, the major banks are woefully under capitalized and as I have been saying for some time, the equity injections are not enough, they are just absorbing the losses, they are not being restored to financial health.

Again lets be clear, the major US financial institutions are insolvent, the only thing preventing their equity from going to zero is that the US government is standing behind them.

However according to Chris Whalen, who has been spot on with respect to the problems at the major US banks, the US government's presence may not be enough to stop the equity of firms like Citibank, B of A and JP Morgan from going to zero. Click on the image below to hear Whalen's latest thoughts.


JPMorgan Chase Earnings

Another Kitchen Sink Quarter for US Banks

Remember all the talk a year ago about how US financial institutions were going to have a kitchen sink quarter in 4Q07? That is they were going to take big write-downs on toxic assets to clear the decks and start fresh. That didn't work out so well as subsequently Bear Stearns and Lehman brothers folded, the remaining investment banks disappeared by becoming bank holding companies, WaMu became the biggest bank failure in history and AIG and now Citigroup were effectively nationalized.

So here we are again, just about to get earnings after probably the worst quarter so far in this recession. Once again alanysts are too optimistic with their forecasts, there will be massive writedowns and losses from the major financial instituions again. Deutsche Bank's announcement today is just a taster, from Bloomberg:

Deutsche Bank Reports EU4.8 Billion Loss on Trading

Deutsche Bank AG, Germany’s biggest bank, reported a loss of about 4.8 billion euros ($6.3 billion) in the fourth quarter after the worst financial crisis since the Great Depression pummeled its debt and equity trading results.

The bank fell as much as 8.4 percent in Frankfurt trading. The loss, which compares with a profit of about 1 billion euros a year earlier, also reflects increased provisions for debt backed by bond insurers and “other exceptional gains and charges,” the Frankfurt-based bank said in a statement today.

click on the link for the full story. Also out today a nasty report from Morgan Stanley estimating that HSBC might have to raise $30 billionand half it's dividend, from marketwatch.com.

HSBC Holdings may need to raise $30 billion

HSBC Holdings may need to raise $30 billion in equity and slash its dividend in half, analysts from Morgan Stanley said Wednesday in a research note that challenges the perception that the bank is one of the strongest in the world.

HSBC Holdings (HBC) , Europe's largest, is unusual in that it hasn't accepted cash from any government during the credit crunch.

Morgan Stanley has long had a bearish stance on HSBC, with the broker in November estimating a capital shortfall of $25 billion that it could fill by raising $15 billion in capital and cutting its dividend in half.

But now the brokerage says HSBC needs to raise between $20 billion and $30 billion and is still calling for a halving of its dividend.

The note penned by a team led by Anil Agarwal says the group's Asian franchise isn't as well capitalized as thought. By Morgan Stanley's reckoning, HSBC's Hongkong and Shanghai Banking Corp. division has one of the lowest reserves of any Hong Kong bank, and needs an extra $5.8 billion.

Plus, HSBC has already padded its U.K. and U.S. businesses by roughly $11 billion, leaving little cushion at the group level. Morgan Stanley estimates that further losses in the U.S. will require another $5 billion in equity. And it says it can't rule out HSBC not paying a dividend for two years.

There is a good chance Morgan Stanley may be wrong, but even if they are only half right a $10 - $15 billion dollar capital shortfall is no laughing matter.

As repeated here many times, the capital injections to date for major financial instituions are just the beginning, the banking sector still needs vastly more capital to restore some semblance of normalcy. Citigroup proved that point recently when they were effectively nationised with another $20 billion injection. Now out of desperation they are selling a stake in their prized brokerage operation to raise yet more capital.

PWK Salvages PPC-1

Pipe Networks (PWK) announced on Friday that PPC-1, the proposed Guam to Sydney submarine cable system will go ahead as planned. A couple of weeks ago the project was in some doubt as the banks would not commit to the funding.

However, common sense prevailed and PWK management was able to bring together both customers and suppliers to work out a deal. The company reiterated previously announced guidance of NPAT of $11 for this financial year and said previously announced guidance for FY10 of NPAT of $17m would also be unaffected.

Obviously this is great news for shareholders, the stock has taken a beating on the back of fears that the project might not go ahead. As the company said:

"It is a testament to the commercial potential and importance of the project that an alternative agreement could be reached that side-stepped the debt markets for primary project financing. I congratulate the team who have been working tirelessly over the past three weeks to bring about this outstanding outcome."

If those aforementioned forecasts are met, this stock is currently very undervalued. Given Pipe's record to date, there is no reason to think they won't be. Whilst it is hard to look through the current economic malaise, for long term investors it is worth considering where this company will be in 5 years from now. With the PPC-1 cable giving PWK all kinds of expansion opportunities into the asian-pacific region, this is a company you will want to own.

REF Profit Downgrade

Reverse Corp (REF) today announced that it expected 1H09 NPAT to be in the range of $7.5 - $8.5m or 8 - 9 cents per share. That compares to NPAT of $10.2m in 1H08. Whilst the AUD/GBP exchange rate for the current half has been worse than 1H08, these forecasts clearly demonstrate that REF is experiencing a slowdown in call volumes.

The company also reiterated that they intend to keep their dividend policy of paying out up to 100% of profits in dividends. If we take the mid point of the company's guidance range and assume the company can match it's first half performance in the second half, we come to NPAT for the full year of $16m. That represents a decline of about 20% from last year.

Last month when I bought some more REF shares I said that even if REF cut their dividend by a third to 16 cps for the full year, it would still represent a very attractive yield. Given the new guidance, a full year dividend of 16c per share seems likely as that represents a payout ratio of 92%, well within REF's stated policy and guidance.

An 8c dividend for the first half is in the bag given the guidance, the question is whether earnings deteriorate futher in 2H09.

Punching in a $16m NPAT for FY09, I value the stock at $1.56 per share, that is assuming a dividend payout ratio of 100% going forward and a reduction in ROE from just over 200% to about 180%.

The good news is that the market had already priced in a pretty bad outlook for REF. The realization that buying shares of REF today will earn you a dividend yield in the range of 15% is still an attractive proposition. The longer term issue for REF is can they successfully grow the business through geographic expansion and higher penetration rates in existing markets. To date, the company has had mixed success with it's growth plans.

Doublling Down with REF

"When stocks go down and you can get more of them for your money, people don't like them anymore." Warren Buffet.

What Buffet was getting at in this quote is that whilst people are willing to pay for a stock at say $2 they are unwilling to buy them when they fall to $1, even though you can get more of them for the same amount.

That's not to say that you should double down on any stock because the price halves. However, if the fundamentals remain in tact and you are paying a price significantly below intrinsic value, then why wouldn't you buy more? That is at least my rationale for purchasing another 10,000 REF shares today for $0.98.

I first purchased REF shares back in February at $2.22, at that time I was a little overly optimistic about earnings growth. Not because I thought the business would do better but I didn't anticipate the strong AUD which affected REF's GBP profits, from which they derive the bulk of their earnings. That exchange rate has improved in 1H09 to an average of0.454 as opposed to an average of 0.468 in 2H08. However it is still above the average for FY08.

Consensus earnings estimates are forecasting a decline of about -7.1% for FY09 and a cut in the dividend from $0.24 to $0.21. No, that is not a misprint, the stock is currently $0.96 and is forecast to deliver a FY09 dividend of $0.21 cps, for a dividend yield of almost 22%.

Using the consensus number, I value the stock at around $1.80 - $1.90. Remember this company has a return on equity in excess of 200%, has no debt and generates a trememdous amount of free cashflow which they pay out as dividends.

Of course, the effect of the current economic malaise is as yet unknown, however even if the company were to slash their dividend by a third from last year's level, at current prices you would still be receiving a 16% dividend yield. If earnings and divdends were halved, a scenario I think is very unlikely, you would still be getting a 12% yield. That's much better than I can currently get in the bank and thus an offer I can't refuse.

CBA Profit Warning ... I mean Trading Update

CBA today released their quarterly trading update for September which you could easily mistake for a profit warning. Here is the money quote:

While there is no evidence of systemic credit issues, the Group‟s exposure to Lehman Brothers, Allco Finance Group Limited and ABC Learning Centres Limited will result in significantly higher first half provisions.

Significantly higher than what? The first half of 2008? If that were the case you'd have to think that 1H09 would at least match the level of 2H08. Currently consensus estimates have CBA's FY09 profit basically flat compared to FY08. That is looking doubtful after today's announcement.

On the positive side, deterioration across CBA's entire asset portfolio has been relatively mild. However the risk is of course that the Australian economy gets materially worse, unemployment rises and therefore credit impairments. Given the recent barrage of negative economic data that is much more of a possibility than most mainstream economists expect, and know how well the mainstream has done over the past 18 months.

Still, if I had to pick one Australian bank to invest in over the long term, it would be CBA. After today's routing the stock is now yielding over 8%. But can that dividend yield be relied upon?

Update: I just spied this smh.com.au article which suggests CBA's total provision for bad debts could rise to as much as $2.3 billion in 2009, more than double that in 2008. That would definitely mean the current projected dividend yield won't hold up.

How Bad Can it Get for Retail?

Hot on the heals of the Circuit City bankruptcy announced on Monday, Best Buy today announced a sharp revision to it's full year profit forecast citing the worst times in 42 years of retailing. From Bloomberg:

Best Buy Cuts Annual Profit, Sales Forecasts on Slump

Best Buy Co., the largest U.S. electronics retailer, said full-year profit will be lower than it expected because of the recent turmoil in the financial markets and the U.S. economic slump

The shares dropped as much as 17 percent in early New York trading after the chain said profit for the year through February 2009 will be $2.30 to $2.90 a share. Revenue may range from $43.7 billion to $45.5 billion, Best Buy said today in a statement.

Sales at stores open at least 14 months may decline as much as 15 percent in the four months through February as consumers grappling with the worst financial crisis since the Great Depression cut back on spending. Circuit City Stores Inc., Best Buy’s largest electronics competitor, filed for bankruptcy protection Nov. 10 after suppliers cut off credit and demanded cash for shipments.

“In 42 years of retailing, we’ve never seen such difficult times for the consumer,” Brian Dunn, president and chief operating officer, said in the statement. “People are making dramatic changes in how much they spend, and we’re not immune from those forces.”

Best Buy forecast in September adjusted full-year profit of $3.25 to $3.40 a share on revenue of $47 billion. Analysts surveyed by Bloomberg estimated profit of $3.04 a share on sales of $46.4 billion.

Best Buy dropped $2.79, or 12 percent, to $21.09 at 8:29 a.m. in trading before the New York Stock Exchange opened.

With such a wide range given on profit numbers it's clear that there is very little visibility with respect to earnings in the next couple of quarters and in such an environment it is difficult for investors to have confidence buying stocks when CEO's are saying the type of things highlighted above.

Can I be a bank too?

Seriously, you couldn't make this stuff up. American Express is now a bank, from Bloomberg:

American Express Wins Federal Reserve Approval to Become Bank
American Express Co. won Federal Reserve approval to become a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds plummet.

The Fed waived a 30-day waiting period on the application ``in light of the unusual and exigent circumstances affecting the financial markets,'' according to a statement released yesterday in Washington. Chairman Ben S. Bernanke and his colleagues unanimously voted for the action.

I was going to have a rant about how ridiculous this is but Yves Smith did a great job of that over at Naked Capitalism.

Seriously, Amex becoming a bank? This is patently ludicrous. Amex poses no systemic risk, so they don't have a case for needing access to the Fed window. They once owned a bank in connection with their wealth management business, but that is a thing of the past.

The process has now become ludicrous. Amex gets to become a bank to help with its credit card business, which in case you have not been paying attention, has been cutting credit lines to existing customers en masse (I have heard of a case with eight figure net worth, infrequent user, impeccable credit score, who nevertheless had his credit line cut by 50%).

And since no credit card bonds were sold last month, the purpose of this exercise is so that Amex can borrow against its credit card receivables at the Fed window at preferred rates. I am not making this up.

Willem Buiter once said that US regs permitted the Fed to lend against any collateral, including a dead dog. We are getting perilously close to that.

America needs to get its consumption down, but apparently the powers that be are going to use any trick possible to try to keep the American shop-a-holic habit going.

NAB FY08 Profits Down 11%

Considering the massive losses other financial institutions have taken around the world over the past 12 months, NAB's -10.7% drop in cash earnings for FY08 looks very respectable. However, of more interest is the outlook going forward and on that score NAB expects continued deterioration.

Measured half on half NAB profit fell -25% in 2H08 from the 1H08. You can put a lot of that down to the pre-announced losses on CDO's that added up to close to a billion dollars reflected in the sharp increase in provisions shown above. Also not mentioned in any reports I saw was that NAB's tax rate fell to 21% in second half from 27% in the first half. If NAB had the same tax rate in the second half , that would have sliced a further $150m from the bottom line.

On the outlook going forward NAB painted a sobering picture:

Economic conditions appear likely to continue softening well into 2009. The combination of the much higher prices for oil and other commodities seen in recent years with the higher cost and reduced supply of credit represents a sizeable adverse shock to the global economy. The reduction of household sector wealth flowing from sharply lower equity prices and widespread falls in house prices weighs further on economic prospects.

Once again there is no denying that NAB is doing comparatively better than it's global peers, but in an environment of rising bad debts and a slowing in credit growth to businees and households, the outlook for bank profits remains muted at best.

However, if forecasts of 9% earnings growth can be met for next year, the current dividend yield of over 8% looks very attractive, especially as interest rates continue to come down. That is of course if you believe those earnings forecasts, right now that is not a bet I am willing to make.

Walgreen - Substantial Deterioration in US Economy

It is becoming increasingly obvious that the US economy basically fell off a cliff in September. Personally I think the US economy was already in recession but it looks beyond any doubt now. However, since the third quarter ended in September, 3Q08 GDP and earnings will only be a prelude to how bad things get in the fourth quarter. Today Walgreen gave a hint of what is to come:

Walgreen drops bid for rival Longs Drug

Walgreen said it was withdrawing its offer since Longs had refused to hold constructive talks. It also noted the "substantial deterioration" in the outlook for the U.S. economy over the past few weeks. The global credit crunch has forced government-led bank bailouts and cast doubts on the strength of consumer spending.

"We do not believe it would be in the best interests of the shareholders, customers, or employees of either Walgreens or Longs to allow this situation to remain unresolved for an extended period of time," Walgreen Chief Executive Jeffrey Rein said in a letter to Longs.

WaMu Goes Belly Up Who Would Have Thought?

Back in July went IndyMac went bankrupt, I asked the question "Who's Next?" At that time I put forward Washington Mutual as the most likely candidate. More recently I argued that WaMu's future was "beyond question" and labelled them as a "Dead Man Walking" . Lo and behold, today the FDIC and the Office of Thrift Supervision (OTS) put WaMu out of it's misery by facilitating a sale of JP Morgan.

On September 25, 2008, the banking operations of Washington Mutual, Inc - Washington Mutual Bank, Henderson, NV and Washington Mutual Bank, FSB, Park City, UT (Washington Mutual Bank) were sold in a transaction facilitated by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).

In brief, The details of the deal are as follows;

JPMorgan Buys WaMu Deposits; Regulators Seize

JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.'s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.

Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said late yesterday. WaMu's branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

So they paid $1.9 billion but what about the assumptions underlying WaMu's toxic mortgage assets?

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Not mentioned in the Bloomberg story is that JP Morgan said they have been very aggressive in their assumptions. To arrive at the numbers quoted above they have assumed a further -8% fall in US home prices and a 7% unemployment rate.

JP Morgan can call it aggressive if they like, but the fact is US home prices could fall a lot more than another -8% as a lot of pundits, like Nouriel Roubini and Meredith Whitney expect. In addition, given current economic conditions a 7% unemployment rate is not a stretch and could easily prove too conservative.

So who's next big bank to fail? Keep your eye on Wachovia (WB)

Jim Awad Makes a Complete Fool of Himself

I doubt by now that anyone needs to another reason to doubt the opinions of so-called experts when it comes to the stockmarket. But just in case you were beginning to think that you need some guidance, here is a reason to think again.

Stocks Watch Washington, Pt. 2
Jim Awad appeared on Kudlow & Company on Wednesday night and let out this pearl of wisdom when asked about one stock market pick for investors:

“One pick, well you want long term international growth and a current dividend and exposure to a turnaround in financials I gotta tell ya, if GE doesn’t work nothing works.”

Then less than 12 hours later GE drops this little bombshell.

GE Cuts Forecast, Suspends Buyback on Market Weakness
Sept. 25 (Bloomberg) -- General Electric Co. reduced its annual profit forecast for the second time this year and suspended its stock buyback because of ``unprecedented weakness and volatility'' in financial markets.

Full-year earnings will be $1.95 to $2.10 a share instead of the earlier projection of $2.20 to $2.30, Fairfield, Connecticut- based GE said today in a statement. The world's fourth-largest company by market value fell in early New York trading.

So I guess Jim Awad is now thinking nothing will work. Nice one Jim, made a fool of yourself on national TV. However, in anindustry with no accountability, he will be invited back next week to espouse more of his 'expert' views.