RD's Picks

We've still got some earnings reports to go, but so far among the banks we've got none that are good, Wells Fargo and JP Morgan are bad, and Wachovia came in down right ugly.

Despite bad comparisons to last year's quarter, Wells and JPM ended up strong today by reporting quarters that were not nearly as bad as the market feared. Earlier in the week, Wachovia reported big losses that were much worse than expectations and dragged the whole sector down.

Citigroup reports on Friday and ugly doesn't even begin to describe market expectations. Bank of America reports early next week and expectations range from a loss to a small profit. I think Citi has firmly established its place among the ugly. BAC might slide in and just be bad, but then again, they actually agreed to pay money for Countrywide.

Our friends at InvestorPlaceBlogs did a nice summary of the WFC earnings release if you don't want to read the whole statement. I thought the most interesting quote in the release came from CFO Howard Atkins, "The available for sale portfolio consists of agency mortgage-backed securities, which have appreciated in value since the end of the year,..." (emphasis added) I haven't been thrilled with the Fed's apparent decision to inflate the economy out of the mortgage mess, but maybe all these rate cuts, credit swaps and lowered collateral standards at the Fed window are helping recreate a market for mortgage paper. .... Maybe.

If firms are finding it easier to price and trade paper, it could be a huge windfall for JPM. If all the paper that came with the Bear, Stearns buy is actually worth more than pennies on the dollar, JPM stands to make out on the deal.

I haven't read JPM's transcript, but from reports it was similar to Wells'. Company's making money, still lots of tough times ahead.

Significant in my mind for both JPM and WFC was that earnings are enough to cover the dividend payment with some cushion. Looking several months out, it will be interesting to see if Wells feels confident enough to hike the payout in late summer. They've been raising it every year for some time and I'm sure management doesn't want to break the string. JPM doesn't have the 'raise it every year' tradition so they won't be under the same pressure to hike the payout as WFC. For those who haven't checked, JPM yields 3.7% and WFC yields 4.6% - both higher than 10-year treasuries - as long as they continue to make enough to cover the payout.

Also significant, both of these banks are in a position to take advantage of fire sales on assets or acquisitions. For example, WFC recently announced they purchased a number of accounts from C in Nevada and California. Not sure how that works, I assume it's like buying a small piece of C. If anyone has any insight, please feel free to add a comment.

Just to be clear, I have no clue if we're near a bottom for financials. There was some good news in these two reports, but both companies also cautioned that there are still rough times ahead.

I've believed you could nibble and trade quality banks for some time and there was nothing in todays reports that changes my opinion. At this point, 'quality banks' consist of JPM and WFC. There may be some good buys among smaller banks, but I wouldn't touch any others in the big five. The key is patience on buys - when you think it's bottomed, wait 'til it gets cheaper. And if you're trading them, be quick to take profits as you get them.

Bourbon makes blogging more fun.

Disclosure: At time of posting, I hold WFC in both SLO and real life. No position in any other company mentioned.

Comments: View Comments |  Wednesday April 16, 2008  |  Stocks: BAC, C, JPM, WB, WFC,