Monday, 01 November 2010 13:42

How the Sell Side Differs with BoomBustBlog on the Outlook for Big Banks and Technology

It is interesting to see what the analysts on the Street have to say about the companies that I have have commented on in the recent past. Let's traipse through a summary of opinion...

Research Analyst
Company Opinion (10/22/10 – 10/25/10)
GOOG GS JPM MS WFC
Thomson Reuters hold Buy buy hold
Ativo Research sell Strong sell Strong sell Strong Sell
Columbine capital Services Inc. Neutral Sell sell sell
Value Line 4(below Average) 3(AVG. Performer) 3(AVG. Performer) 4(Below Average)
Ford Equity Research Neutral Stong Buy Neutral Strong buy
S&P 3 Star 5 star 3 Star 4 Star
Meredith Whitney advisers hold hold hold
Barclays Capital overweight Equal Weight overweight overweight
Wells Fargo outperform outperform Market Perform
J.P.Morgan overweight overweight overweight
Deutsche Bank buy Buy
Jefferies & company buy
PiperJaffray overweight
Stifel Nicolaus Buy

Here are a few excerpts from the various reports...

Comments from various analyst for JPM

Detailed reports from Meredith Whitney Advisors were not available plus there were no comments on the summary, just some fundamentals chart.

“The market appeared to express reservations presumably stemming from an increase in its mortgage repurchase reserve build and continued high levels of litigation accruals. While these issues create near term headwinds, we believe JPM’s now more than 3 billion repurchase reserve should allow the pace of its build to moderate over the next couple of quarters and do not see its current legal challenges materially impacting its earning power outlook”.  – Barclays capital.

In regards to the forward looking statements. “It noted that as its card losses normalize in the 4.5% area then another $4-$6 billion reserve release is possible” – Barclays

“JPM released $1.5 billion of reserves in card services and continued to under-provision in aggregate: additional future reserve releases are likely, in our view”- WFC

“JPM believes foreclosure matter a short term challenge”.”JPM is currently reviewing approximately 115,000 files currently in the foreclosures process and noted that by the time a foreclosure sale occurs a borrower is 14 months delinquent(with New York averaging 26 months and Florida Averaging about 23 Months).”-WFC

“Trading at just 4x our 2012 EPS estimate, we believe wfc shares are the most compelling within our large cap bank universe.” -  Stifel Nicolaus.

Here my public and subscription-only comments on JPM. Notice that I focus on issues that rarely, actually practically never appear in the sell side and large equity research house reports:

Older yet still quite relevant research:

  1. An Independent Look into JP Morgan (subscription content free preview!)
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 – JP Morgan
  3. Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!
  4. Anecdotal observations from the JP Morgan Q2-09 conference call
  5. Reggie Middleton on JP Morgan’s Q309 results
  6. Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results

Comments on WFC

“Positives for the quarter included strong mortgage banking results coupled with a solid pipeline looking out, lower loan losses and expectations for continued loan loss reserve release, and improved capital ratios with an eye toward a possible dividend increase when the industry returns to that path. The company appeared unfazed by recent mortgage repurchase concerns and downplayed risks associated with private securitization where WFC originated the loan.”- Barclays Capital

“with respect to private securitizations where WFC originated the loan and therefore has some repurchase risk (~$140 B), 55% are from vintage 2005 and prior 83% are prime, and it had $69 million of repurchases in 3Q10”-Barclays

“WFC expects the issue to be manageable as only 8%($145 bil) of the portfolio is private label MBS and of this, 83% is prime jumbo. Mortgage repurchase expenses declined a tad qoq but losses up sharply and therefore repurchase reserve declined. Similar to peers WFC is seeing about 50% approval rate and 50% loss severity.- jpm

“Based on management discussion…..The Company would have a $1.25 billion loss tax-affected loss exposure on its $144 billion in private label originations. We simply applied delinquency rate of 10% on the prime portion of these loans and a delinquency rate of 39% on the non-prime and then assumed a 20%successful loan put back rate and a 50%loss severity on loans repurchased.- Stifel Nicolaus

I am still working on the Wells Fargo updates. Our research from 2008 ran contrary to the entire sell side, and as we predicted WFC took a very big dive, producing profits for the bears. Subscribers, see WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb, ~ WFC Off Balance Sheet Exposure WFC Off Balance Sheet Exposure 2009-10-19 04:25:53 258.77 Kb ~ WFC Investment Note 22 May 09 - Retail WFC Investment Note 22 May 09 – Retail 2009-05-27 01:55:50 554.15 Kb ~ WFC Investment Note 22 May 09 - Pro WFC Investment Note 22 May 09 – Pro 2009-05-27 01:56:54 853.53 Kb ~ Wells Fargo ABS Inventory Wells Fargo ABS Inventory 2008-08-30 06:40:27 798.22 Kb to expound on our opinions of Wells Fargo, below.

Comments of GS

“Seperately, management also provided some color around the recent foreclosure/mortgage industry issues and potential impacts on the business noting that they were not a very big player in either the origination business (40th largest originator from 2005 – 2008  originated 30B and GS originated $1.75 B) or the securitization business (not in top 5)- Deutsche bank

“Interestingly, we noticed a 1/3 decline in currency VaR during the quarter, suggesting to us that the firm has stepped back meaningfully from FX trading” –Barclays

The firm continue to see outflows from its asset management business, with the highest outflow from equity funds ($8B or 6%)”-Barclays

The long term picture looks positive for GS being a winner in a world of high frequency trading ability in a more transparent/ cash –like fixed income world considering its strong technology.”JPMorgan Cazenove

Comp accrual needs to be adjusted in Q4. Clearly GS might adjust its comp in 4Q-as it did last year reducing the accrual level from 47%in 9M09 and paid out 36% for FY 2009, adjusting 2009.We estimate FY 2010 comp/revenue ratio to come down to 39% through adjustment  in Q4 compensation expense and expect comp/revenue ratios of 40% in 2011E and 2012E.- JPM

Comments on MS

Revel marked down again-but future risk is limited. As a result of MS’ decision to sell its Revel real estate development in Atlantic City, MS updated its view on the worth of the investment driving a write-down of about $200M. MS noted that valuations for the partially completed casino property are driven by valuations related to the gaming industry than valuation trends in CRE markets.  The current carrying value is approximately $40 MM at present”- WFC

“our preference is for GS over MS. So why is MS an OW? The simple answer is that we view the stock as cheap. It Trades at 0.8x fully diluted tangible BV 2012 E, for RONAV ex own debt of 10%. With MS  GWM an important earnings deriver going forward , no capital issues , and a cleaned up structured credit book – franchise re-rating is possible over the long term , in our view.” Barclays

Equities were solid considering MS had no material hedging losses in Equity Derivatives in 2Q and expected to hence have limited gains in 3Q compared to peers(see gs 2Q vs 3Q)

My Morgan Stanley update should be available to subscribers in about 48 hours. Below is my historical opinion...

Trading revenues account for 37% (TTM basis) of total net revenues of Morgan Stanley and fluctuations in this line item can significantly influence the revenues and profitability of the company. The effect of high volatility of trading revenues has trickled down to its net revenues and earnings and the same is reflected in the chart below:

We have uncovered hints of solvency stress (considerably more so than that of Goldman’s) and the usual high risk after pouring over Morgan’s books. All paying subscribers can download our analysis and view of MS’s latest results below (click here to subscribe):

Comments on Google

“We believe 3Q10 results and increasing evidence that display and mobile are becoming more material drivers will help bring investors back to Google shares. -Barclays

What concerned us- heavy capex spending/heavy headcount additions/4Q  CPC facing tougher comps.

What surprised us – Google Instant has Minimal Revenue impact - Barclays

“While we knew there was tremendous momentum in the world of mobile (more especially the Android O/S) and display advertising (Doubleclick Exchange and YouTube/video), it now appears Google has clearly become a three headed monster in terms of paid search via  desktop internet, display advertising as well as advertising in the rapidly growing Smartphone world.- Deutsche Bank

“Google no longer a one trick pony - Jefferies

My question is, where were the bullish comments BEFORE earnings and throughout all of last quarter.We first turned bullish on Google in June and got the full forensic report well before earnings.

I strongly urge all paying subscribers to read and reread the longest forensic analysis that I have ever released (@63 pages): File Icon Google Final Report, as well as the File Icon An Analysis and Valuation of Google’s Android and AdMob. Professional subscribers are strongly urged to play with all of the market and valuation models that we have to offer (click here to subscribe or upgrade):

This carries on with the strong performance of the Research in Motion Analysis, which I am now giving away for free since it has hit our initial price point, see The Research In Motion Forensic Valuation and Analysis is Released to the Public. …

Google has devised a stratagem to literally knock the ball out of the park. Knowing how bearish I am on the US equities market, this should be saying a lot coming from me.

  1. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  2. This article should drive the point home: 
  3. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  4. Android is gaining preference as the long-term choice of application developers
  5. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  6. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  7. More of the Android Onslaught: Increasing Handset Revenues and Growth
  8. The Complete, 63 pg Google Forensic Valuation is Available for Download
  9. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  10. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  11. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?

Of course, many of these observations above may not be surprising to some, since the best performing sell side analyst during this time period (save yours truly, of course) only racked up 38% in accurate calls: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Those interested in subscribing to BoomBustBlog should click here.

Last modified on Tuesday, 02 November 2010 08:36
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