Earnings and Headlines 7/21/2010

• Morgan Stanley had a great quarter! Seriously! I know, I can't believe it either (see yesterday's highly inaccurate prediction below.) The investment bank roared back into the big leagues with a second quarter profit of $1.96 billion, up from $149 million a year earlier. $514 million of that was related to the sale of its retail asset-management arm, but earnings on a continuing basis were still better than expected. Results in its new and improved asset management unit were boosted by the purchase of Smith Barney from Citi. CFO Ruth Porat stated that although the banking industry will undergo a period of intense scrutiny, the firm was not a target of a major investigation. So things are looking up including the stock price, which is up 8%. Now go sell your real estate arm while you have the chance.
• BlackRock also had strong results, posting a near doubling in quarterly profit to $432 million. The surge in profits was attributed to the purchase of BGI last year. Seems like the thing to do to boost profits is go out and buy a money manager.
• Wells Fargo posted a profit of $2.88 billion, higher than last year's $2.58 billion but on slightly lower revenues. Results were better than expected and the stock is up 5%.
• The WSJ's quarterly housing report is out and shows a deteriorating housing market. It's nothing you didn't already know; pending sales down sharply after expiration of tax credit, new housing construction down, inventories up across the board. etc etc. But it has a nice city by city chart that makes you say things like "Wow, I'm glad I don't live in Detroit."
• MBA purchase applications are actually up slightly, which may have something to do with mortgage interest rates being at their lowest levels in the history of the universe.

Goldman Sachs' Earnings Miss Estimates

With the $550 million settlement with the SEC behind it, Goldman Sachs can get back to doing what it does best: trading, advising, and then trading ahead of its advice. The problem is, even if you are the best at front-running, picking-off, and lobbying, there's not much you can do about lackluster markets.

Earnings for the investment banking giant were pretty weak, $0.78 a share to be exact, which was a far cry from the $4.93 a share GS earned in last year's second quarter or the $5.59 per share it earned in the first quarter of 2010. Even when adjusting for the impact of the UK payroll tax and the SEC settlement, earnings of $2.75 per share are pretty paltry, yet somehow the stock is only down around 3% on the news pre-market. Given the size of the miss, I would've expected a bigger hit. Maybe investors were prepared by the lousy investment banking results out of the big banks. Or maybe nobody's awake yet.

Goldman Earnings Fail to Inspire as SEC Threat Looms

Goldman Sachs posted a robust quarterly profit of $3.46 billion, besting even the most optimistic analysts' estimates for earnings. Revenues were also 36% higher year-over-year to $12.78 billion. Nevertheless, investors yawned and pushed the sell button, forcing the stock slightly lower in early morning trading. Perhaps investors are merely licking their wounds after the drubbing the stock took last Friday on the heels of the announcement that the SEC was leveling charges against the firm for pumping CDOs while betting against the same CDOs in house. The company's shares can't seem to resume their peppy march higher with such sinister enforcement action, not to mention a potential major regulatory overhaul, on the horizon.

If the SEC's charges sound familiar to you it may be because they sound exactly like the charges that seem to be leveled against Wall Street firms every few years. Don't believe me? Try replacing the word "CDO" with "IPO" and see if you're taken back in time to the turn of the century. You see, herein lies the problem. Peddling crap to investors, while secretly knowing it is crap is what Wall Street does for a living. It's why Wall Street is referred to as the "sell side." There is this pool of natural buyers called the buy side. The buy side has money and needs to buy stuff. Investment banks create products for them to buy and then "market" those products in order to sell them out of their inventory for more than where they have those items marked, regardless of whether those items have any value. Investment banks hire a bunch of young, smart, kids out of great colleges to put together 500 page pitch books, which nobody reads, to peddle their latest creations. Then every couple of years everyone is ABSOLUTELY SHOCKED that Wall Street was selling stuff that they knew was garbage. How did that pets.com stock perform? Miserably? Really? We really thought that a $500 billion market cap made sense. I mean the company had almost $2 million in revenue. How about those Enron bonds? Worthless? I can't believe it, because, you know, when we were busy helping them create off- balance-sheet partnerships to sell their own assets to themselves at inflated prices, we really thought the company was just brimming with value. Worldcom bonds? I can't believe those didn't work out for you. I mean, our analyst, who was just trying to get his kids into a fancy upper east side preschool by kissing the CEO's ass and upgrading the stock to a "strong buy," really thought that was a good one. Wow, did we really just bankrupt Orange County? Oh sorry, I shouldn't be dating myself, why don't we just stick to the more recent Jefferson County.

I could go on, but I'll stop here. Does the SEC have a good case against Goldman and other banks that I'm certain did the same thing? Probably. Is it going to get us anywhere? Probably not. Banks will pay the fine, a few heads might roll, but we'll move on. Nothing will change. Why? Because Wall Street's motto is to make as much money now as you possibly can now, get paid, pay the fine and retire with a boatload of money when you're forced out. If we wanted the cycle to stop, we shouldn't have bailed them out.

Earnings, Losses, and Excuses

First the good news:

• Both JP Morgan and Intel reported solid earnings. Profit at JP Morgan rose by 55% from a year earlier to $3.3 billion helped by a sharp 30% reduction in provisions for credit losses. Oh, and zero percent interest rates. It's always nice when you can borrow money at zero percent from your friends at the Fed and then charge consumers 20%. Really pads the bottom line.
• Meanwhile Intel's quarterly profit nearly quadrupled to $2.44 billion, while revenue rose 44% to $10.3 billion. The tech giant's good quarter bodes well for the rest of the tech sector.

In somewhat disappointing news:

• Investors in Morgan Stanley's $8.8 billion MSREF VI real-estate fund were recently informed that they have likely lost two-thirds of their money. The WSJ helpfully points out that this would probably make it the largest dollar loss in the history of private equity...so far. The losses stem from a buying frenzy during the peak in the commercial real estate market using oodles of leverage. The property purchases were global, so you know, at least they were diversified. Possibly the biggest bummer about the loss is that it's really putting a damper on the firm's plans to raise the $10 billion follow-up vehicle called MSREF VII. Here's a bit of unsolicited marketing advice for the folks at MSREF that I learned in MBA school: maybe you want to rebrand? Give the fund a different name, or something? If I'd lost two-thirds of my money in your last fund, I'm definitely not investing in your new fund, because at this point I'm thinking you guys aren't very good at investing in real estate.

In hilarious, as well as infuriating news:

• From Kerry Killinger, overseer of the multi-billion dollar fraud-infused-subprime-option-arm bubble-frenzy that was Wa Mu in its hey day before it collapsed under the weight of its stinky mortgage self: "For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious. For those outside the club, the penalty was severe." Because underwriting over $100 billion in negative am mortgages without asking for a single W2, or verifying that the borrower actually had only $10K in annual income and $3 in his bank account before giving him a $2 million mortgage on a house that had sold for $300,000 last year had NOTHING TO DO WITH WASHINGTON MUTUAL'S COLLAPSE. No, it was the lack of a government bailout. You see, if only Washington Mutual had been bailed out by the government instead, it would've survived and would've been in tip top shape. This was all part of Mr. Killinger's business plan, and the FDIC had to go and ruin it all by seizing his bank. I mean, really, they had some nerve.

Goldman Sachs Posts Profit of $4.95 Billion, Still Not Good Enough

In what is bound to anger a bunch of people for a variety of reasons, Goldman posted one heck of a profitable quarter. First of all, the investment bank's profit of $4.95 billion, or $8.20 per share makes the guys at Morgan Stanley look like a bunch of losers (of money, as well as sissies who wouldn't understand a steep yield curve if it hit them in the head.) Then, of course, there are all of those folks in government (the few that never worked for Goldman) who have to fire up better versions of their "evil bankers who steal from the poor and uninsured" speeches before the next election or face the fate of Martha Coakley. Let's not forget the hapless employees of Goldman Sachs, some of whom have been rumored in the press to be unhappy with having to accept compensation in any form that is not their well-deserved cold hard unrestricted cash. I don't even have to mention what Rolling Stone readers must be thinking...

I will give the guys at Goldman a big gold star because investors so far are not that impressed (the stock is only up 1% currently.) That bank knows how to make money. Government subsidies, zero interest rates, once-in-a-lifetime opportunities in fixed income trading, raging commodities bull markets, massive volatility in equities, WHATEVER. The bank is not afraid to take those opportunities, pile on the risk (which Mr. Blankfein will tell you they are masters at managing) and knocking the ball out of the park. Sure it was bailed out last year, but so was Morgan Stanley and it still lost money in 2009. That preposterous sounding vampire squid analogy appears more apt with every passing day.

Bank Earnings Fail To Impress Market

• Bank of America managed to only lose $194 million in the fourth quarter. Oh, wait a minute, that's only if you exclude the $5 billion or so it cost the largest US lender to repay the government. But a $194 million loss just sounds better, doesn't it? So let's just pretend that BAC never had to hit up the Treasury for a bailout and forget that silly "non-recurring" expense. What's really important is that the bank can return to paying its employees whatever it wants and paying out dividends without any consideration as to whether it can afford to or not.
• Wells Fargo posted a profit of $2.8 billion, or 8 cents a share, beating expectations of a small loss. Revenues also rose by 1% to $22.7 billion.
• Meanwhile, Morgan Stanley, the former investment banking powerhouse that is currently a cowering and meek Goldman Sachs wanna-be, missed earnings estimates. Frankly, it's hard to figure out exactly what MS did this quarter given the confusing media reports. The Financial Times claims that the investment bank recorded net income of $1.1 billion but a loss of 93 cents a share including the TARP payment. I like how the earnings are in hard dollars but the loss is in earnings per share. Sounds better that way right? The folks at the WSJ report that MS posted a profit of $617 million or 29 cents a share, but earnings from continuing operations were 14 cents a share. The WSJ conveniently excludes the loss including the TARP repayment (I guess they're bullish?). Meanwhile, Bloomberg gives the only information you need to know, that MS will pay out a whopping 62% of revenues in compensation. What I want to know is this: If you are going to pretend like you are Goldman Sachs and pay GS-style bonuses, shouldn't you at least make money like GS does?

Citi's Investors Never Sleep Either

In comparison to the multiple billions in earnings and market cap that Citi has parted ways with in the disastrous last couple of years, a $7.6 billion loss is chump change. But still, with all of the bravado coming from the banking industry, you'd think Citi could rub together a bit more than a loss of 33 cents a share. Yes, most of the loss was related to paying back the government, but then maybe that's just a sign that it should've waited to be profitable before rushing to pay the government back just because it had to pay its employees "competitively?" (i.e. so they wouldn't all run away to work for Goldman. As if Goldman would ever stoop so low. I mean, the folks at Goldman only hire "real talent.")

But no worries, Citi plans to earn its way out of the hole it dug for itself when it decided to pile full throttle into the booming CDO market (as well as every other over-priced asset in the credit boom.) Maybe one of those bullish analysts can explain how you earn your way out of a hole by continuing to post losses.

GM Shows Improvement, Only Loses $1.15 Billion

GM posted a $1.15 billion loss for the shortened third quarter and confirmed plans to accelerate repayments to the US and Canadian governments. The good news is that this loss was better than the $2.5 billion it punted last year. Furthermore, the automaker actually had positive cash flow to the tune of $3.3 billion instead of burning through $6.9 billion, like it did in last year's third quarter. But still, the automaker supposedly shed its burdensome cost structure in bankruptcy, emerged from Chapter 11, benefited from the government's massive cash-for-clunkers subsidy and it still lost money? Sorry, but color me not wildly impressed by this quarter's earnings report.

Nevertheless, an improvement is an improvement, so I'll give GM bonus points for that. Unfortunately, GM lowered its expectations for US auto sales in 2010 to 11 million to 12 million from the 12.5 million forecast in April. It expects global sales to come in between 62 million and 65 million sales. As for the loans that GM is planning to pay back to the US and Canadian governments, it will use other money it received from the government to pay back the borrowing. Just like a ponzi scheme, but it only requires one eager participant.

AMZN, MSFT Boost Nasdaq

Microsoft handily beat analysts estimates, posting first-quarter net income of $3.574 billion or $.40 cents a share, down from $4.373 billion or $.48 cents a share last year. Revenues for the quarter were $12.92 billion, down from $15.06 billion in the prior year's quarter. Better than expected but still down year over year. Nevertheless, the stock was up 10% on the open, but has given some of that back as the rest of the market is not participating.

Amazon, on the other hand, is up a whopping 20%, on some very robust earnings results. Third-quarter profits were up 69% helped by a 44% rise in sales of electronics and general merchandise. Net income for the quarter increased to $199 million, or 45 cents a share, from $118 million or 27 cents a share in the year ago quarter. Overall sales were up 28% to $5.45 billion. Amazon is forecasting sales growth between 21% and 35% for the fourth quarter, with net income projected to rise between 10% and 56%. Great numbers in the face of a tough retail environment, but the stock is now trading at a 74 p/e. A bit much perhaps?

Housing, Apples and Guns

• Housing starts climbed a less-than-anticipated 0.5% to a seasonally adjusted 590,000 annual rate compared to the prior month. August starts were revised lower to an increase of 1.0% from an initial report of a 1.5% increase. Building permits dropped 1.2% to a 573,000 annual rate. Permits were expected to rise by 2%. A slightly disappointing report for all those housing cheerleaders.
• Apple posted a 47% quarterly profit jump on strong sales of iPhones and Macs. iPhone sales were up 7% year over year and Mac sales were up 17% year over year. Revenues were up 24% to $9.8 billion. Like Google, reporting a year-over-year increase in sales is rare and greeted with yet another pop in the stock price, even after strong run-ups in anticipation of good earnings.
• The WSJ reports that Cerberus, everyone's favorite private equity group, is preparing to IPO its company called Freedom Group. Freedom is a combination of several gun and ammunition companies that Cerberus has been acquiring over the years, when it wasn't busy punting money on bankrupt automakers. Freedom is hoping to capitalize on a surge in gun and ammo sales this year and in contrast to most of its other investments, this one should actually be a winner for the beleaguered investment group. The article is accompanied by a photo of a girl who looks around 12 years old testing a Bushmaster rifle. Who says financiers don't have a humanitarian side?

Goldman, Citi Temper Dow's Enthusiasm

While Goldman's earnings were better than expected, the stock has been unable to maintain its recent momentum. Although nearly anything impresses the equity market these days, beating earnings expectations when everyone is expecting you to beat earnings expectations is met with a ho hum reaction by investors. Go figure. Goldman posted a profit of $3.19 billion or $5.25 a share, up from $845 million or $1.81 a share a year ago. Revenues doubled to $12.37 billion. The best performing areas were the fixed income, currency and commodities trading group (once again, why on earth are investors and analysts not perturbed that the company lumps earnings from these units together?) and principal investments. Shocker that their principal investments rose when nearly every single asset class on the planet rallied in the third quarter. Little doubt, however, that these guys know how to make money when they are handed every opportunity on the planet by the federal government.

Citi, on the other hand, is still struggling under the weight of all of its bad lending and investment decisions during the credit bubble. The bank actually posted a profit, mostly due to an $851 million gain from its securities-exchange efforts in the quarter to convert the US government's preferred to common. Citi posted a profit of $101 million, compared with a year-earlier loss of $2.82 billion. If you include preferred dividends, which you should because that is cash out the door, the company lost 27 cents per share. Revenue rose 25% to $20.4 billion. One positive note is that cash and deposits jumped 17% during the quarter. However loans fell by 11%. Not good news for a weak economy that needs its banks to lend to spur growth. Just more evidence that the government's efforts to prop up the banks have only succeeded in propping up the market and banker's pay packages, and have not yet succeeded in feeding into the real economy.

JP Morgan, Intel Earnings Boost the Market

Who knew that force feeding banks free money, while allowing them to hike rates and fees and easing mark to market rules would provide such an earnings bonanza? JP Morgan didn't miss a trick this quarter posting a profit of $3.59 billion or 82 cents a share, handily beating analysts estimates of 52 cents a share. Revenues were up 81% to $26.62 billion. A sure sign that the bank's good fortune isn't necessarily being passed on to the rest of the economy is that loan balances continued to shrink despite a stabilization in assets and deposits. Credit-loss provisions which were $9.8 billion, up $3.1 billion from a year earlier and $100 million from the previous quarter painted a more sober view of the bank's business. Net charge-offs surged to 6.29% from 3.39%.

Meanwhile, in Techland, Intel, the chip giant, served up better than expected earnings as well, posting net income of $1.86 billion on $9.39 billion in revenue. Although these numbers were largely better than expected, revenues were still down 8% year over year. Intel also raised its revenue guidance for the fourth quarter to around $10.1 billion.

Now that everything is back to normal, and Wall Street is talking about doling out record bonuses again as if nothing ever happened and they didn't cause a financial meltdown that wrecked our economy and required government intervention, can we please ratchet back some of the crazy monetary policy the Fed is doling out? Please? Like maybe before the dollar goes to zero and gold goes to $5,000 an ounce and oil to $250 a barrel?

REIT Earnings Disappointing

Two of the largest REITs, Simon Property Group and Vornado Realty Trust, reported earnings results this morning. Contrary to the recent surge in their shares, which would imply that REITs were having a bang-up quarter, both posted losses, sharp declines in FFO, and lower vacancy rates amid deteriorating fundamentals in the commercial real estate market. Simon Property Group posted a $14.1 million loss on a $140. 5 million write-down, compared with a year ago profit of $114.4 million. Funds from operations fell to 96 cents from $1.49 last year. Revenue decreased 11% to $903.6 million. Occupancy rates were down to 90.9% while average rents rose 3.8%. Vornado Realty reported a loss of $37.6 million on a $122.7 million loan loss, compared with a year-earlier profit of $131.1 million. Funds from operations declined to 54 cents a share from $1.19. Revenue was slightly higher by 0.6% to $678.4 million. Occupancy rates fell to 96.1% from 97.5% in New York offices, but rose to 95.4% from 93.9% in DC. The loan loss was related to the company's 33% interest in Toys "R" Us which the REIT helped take private in 2005.

What is with all the recent bullishness in REIT stocks? The WSJ had a front page story yesterday questioning the rally in the sector. According to the article, REITs face $152 billion in debt maturities through 2013 while commercial property values have plummeted and seem likely to continue to do so. The most compelling reason to buy REITs in an environment where asset values are declining has been the yield, which during the lows hit roughly 10%. But at current prices, yields are roughly 4.7%, lower than some corporate bonds. Certainly the bulls will throw out the argument of 4.7% yield plus all that upside appreciation potential. But with the way the commercial real estate market looks today, the days of appreciation in commercial real estate properties are very far away. So if you think a 4.7% yield is "juicy", go buy some long bonds.

Rally Peters Out Over Sobering Earnings Data

We're had quite the rally in the past few weeks. I know this because both the front page of the Wall Street Journal and Financial Times trumpet the Dow's return to 9,000. So it was only fitting that three fairly significant companies had to report weak earnings right after the close and spoil the party. Microsoft posted a jarring 17% revenue decline and 29% drop in profits, citing falling global demand for PCs and servers. Furthermore, this fiscal year (the company just reported its fourth quarter) marked the first time that Microsoft faced a revenue decline for the full year. Better earnings released earlier from Apple, IBM, and Intel had sparked hopes for better results from Microsoft and the rest of the tech sector. While Amazon had a 14% increase in sales, its profit fell 10% to $142 million. Since the online retailer has always believed in "providing customers low prices, vast selection, and fast delivery," (a direct quote from Mr. Bezos) the company's shareholders have the stock priced at an earnings multiple of 60, hence the 8% shellacking in the stock price. AmEx's net profits fell 48% on an increase in charge-offs. The company said that consumer spending declined by 16% in the second quarter and charge-offs increased to 10% from 8.5% in the previous quarter. One bright spot was the fact that only 4.4% of customers were one month behind on their payments, which was an improvement from the prior quarter's 5.1%. Perhaps delinquencies have peaked? Maybe, but if the job market gets worse that seems unlikely.

Nevertheless, stocks are only off modestly compared to the recent powerful rally. Maybe we can finish the day with the Dow still above 9,000 and investors can have a nice, restful weekend? That's assuming that the FDIC takes the weekend off and decides not to seize Guaranty Financial or Corus Bank this Friday. But then again, what's another two bank failures, albeit fairly large and expensive ones, when you're already expecting 500?

Ford Making Money Again, Sort Of

The pride of the US auto industry demonstrated why it was the only major US automaker to avoid a government-sponsored bankruptcy. Ford posted net income of $2.3 billion or 69 cents a share for the second quarter. This was a huge improvement over the $8.67 billion it punted last year in the same period. The company still managed to burn through $1 billion in cash for the quarter, which was less than analysts' expectations. Of course, Ford's profit came largely from a $3.4 billion gain it received related to its debt-restructuring in April. Excluding the one-time gain, the company would have narrowed its quarterly loss to $424 million. Revenues were also down from $38.6 billion in last year's period to $27.2 billion. It must be painful sitting around and waiting for the economy to turn while you continue to bleed cash. But Ford is betting that it will survive, without the need for a bankruptcy filing or government aid down the road. If the legendary automaker survives, business school case writers will be scribbling furiously to document the story of Ford's survival of the crash of 2008.

WFC, MS Earnings

Morgan Stanley's earnings were subpar, according to the ticker. Second-quarter income plunged 87% to $149 million from $1.14 billion, while revenue declined 11% to $5.41 billion. Although the results beat the average analyst's estimates, the stock is still trading lower before the open. The weakness in earnings came from a large loss related to the company's credit spreads tightening in the quarter, as well as the cost of paying back the $10 billion in TARP funds it owes Uncle Sam. Fixed income and investment banking revenue jumped 44% and 19% respectively, while institutional-securities swung to a loss on a revenue decline of 24%. In any event, compared to Goldman's blowout quarter, it's hard to be impressed.

Wells Fargo's second-quarter earnings soared 81% to $3.17 billion or 57 cents a share, up from $1.75 billion or 53 cents a share in the prior year. Revenue nearly doubled to $22.5 billion from $11.46 billion, with Wachovia making up 39% of the total. Still, the market is not impressed with the earnings report as the company's stock is trading lower before the open. Credit-loss provisions were $5.09 billion, up 69% from a year ago and 11% from the prior quarter. Meanwhile net charge-offs rose to 2.1% of average loans from 1.54% in the prior quarter, while nonperforming assets grew to 2.2% from 1.5%. With the continued deterioration of the economy, particularly in California, investors are perhaps concerned that the credit loss provisions aren't adequate to cover future losses on Wachovia's legacy option arm and commercial real estate portfolio.

B of A, Citi, GE Earnings

Let's go in alphabetical order, shall we? Bank of America posted income of $3.22 billion or 33 cents a share, down from $3.41 billion , or 72 cents a share. Notice how earnings were down slightly, yet earnings per share were cut in half? That's dilution working for you. It's what happens when you have 64% more shares outstanding due to a capital-raising frenzy. Revenue jumped 61% to $32.77 billion. No indication yet where the increase in revenues is coming from. Actual growth? Merrill Lynch? Countrywide? I presume we'll get a few more details later, but the company did say that results were driven by strong revenues in the wholesale capital markets business and home loans, with most of the activity in mortgages coming from refinance activity. Revenues are up, which I'll take at face value as much better than being down. However, credit-loss provisions more than doubled from a year earlier, while the net charge-off rate surged to 3.64% from 1.67% a year ago and 2.85% in the first quarter. Credit-card managed losses increased to a whopping 11.7% from 5.96% a year ago, and total nonperforming assets rose to 3.31% from 1.13% in the prior year and 2.64% last quarter. Bank of America is pedaling hard against the rising heap of losses in its poorly performing loan portfolio. The question is: Can robust capital markets activity continue to counteract the losses in its loan portfolio until the economy turns?

Moving right along, Citigroup posted a record $4.28 billion in profits! Who needs government help with profits like that? Well, the results were distorted with a little help from a $6.7 billion gain related to the combination of its Smith Barney brokerage operations with those of Morgan Stanley. Conveniently, Citigroup didn't provide results excluding the gain, so I'll have to do my own math. By my calculations $4.28 billion minus $6.7 billions equals a loss of around $2.4 billion. Now this is probably not the right way to do the calculation, but you know, I don't think it would be inappropriate for the damn company to break out its operating results so that analysts and investors can see what the real story is. Particularly when you're on government life support and everyone and their mother is trying to figure out if you're going to survive another quarter.

Meanwhile, GE, that finance company that calls itself an industrial bellwether, reported a 47% drop in second-quarter earnings Friday. GE posted income of $2.67 billion or 24 cents a share, down from $5.07 billion or 51 cents a share a year earlier. Revenue fell 17% to $39.08 billion amid a 29% drop at GE Capital. Analysts expected earnings of 23 cents on revenue of $42.16 billion so I'll call these results worse than expected. GE Capital's profits plummeted 80%, but really the only reason GE Capital is even posting profits is that it isn't required to mark its assets to market. More details on the performance of its loan portfolio will be extremely enlightening. Although the energy-infrastructure business only had a 1% drop in revenue, the consumer and industrial operations saw revenues and profits drop 20%.

GE's stock is down around 4% and seems to be the biggest disappointment to investors. Yesterday's lackluster results from Google, 5% revenue growth for a company that is used to 30% or more, is also weighing on the market. IBM's respectable quarter, a 12% jump in second-quarter profit on a 13% decline in revenues coupled with raised guidance for the forthcoming year, hasn't done much to propel the market higher. If you were hoping for an exciting expiration Friday, you will likely be sorely disappointed.

Financial Headlines 7/16/2009

• JP Morgan's profits rose 36% from a year earlier to $2.7 billion. The bank posted $26 billion in revenues, up 39% from a year earlier. The strong revenues were offset by an $8 billion provision for loan losses. Loan losses continue to rise but the bank believes that the $30 billion it has set aside to cover uncollectible loans should be sufficient.
• CIT was denied government assistance and is scrambling to line up at least $2 billion in rescue funds from existing debtholders. Debtholders have 24 hours to decide if they will come up with new cash. A bankruptcy of CIT could potentially wreak havoc on many small retailers and clothing manufacturers and suppliers that rely on the finance concern to provide cash advances to operate their businesses. Apparently California may be particularly hard hit because of the state's large apparel-import business. Also, the FT reported yesterday that a CIT bankruptcy could trigger widespread losses for investors in the $600 billion market for synthetic CDOs. The company is the second most widely referenced company in CDOs after Volkwagen, with almost two-thirds of those rated by S&P in Europe including it in their portfolios of credit default swaps. Synthetic CDOs are debt products that pool CDS against a range of companies. Shame on you for not knowing that. A credit event could trigger further downgrades of synthetic CDO debt, which would lead to more writedowns. The clock is ticking. Now we wait.
• Unemployment claims declined by 47,000 to 522,000 while continuing claims declined by 642,000 to 6.273 million. Calculated Risk notes that the seasonally adjusted weekly claims are being impacted by the layoffs in the automobile industry and other manufacturing sectors. Usually companies cut back production in the summer and the numbers are adjusted for that pattern, but this year the companies cut back much earlier. The distortion is expected to last another week or two.
• The Philly Fed index fell to negative 7.5% from a nine-month high of negative 2.2% in June. Manufacturing activity has declined for 19 out of the past 20 months. This was a weak report. Not much else to say about that.

Financial Headlines 7/15/2009

• Industrial production decreased 0.4% in June on the heels of a 1.2% decline in May. For the second quarter as a whole, output fell at an annual rate of 11.6%. If you like your data delivered with a bullish bent, click on the Bloomberg link which claims that the continued decline, albeit at a slower pace, is a sure sign that the economy is on the mend. Alternatively, you can visit the realists at Calculated Risk, who point out that capacity utilization for total industry declined in June to 68%, a level 12.9% below its average for 1972-2008. Prior to the current recession, the low over the history of the series which began in 1967 was 70.9% in December 1982. Little reason for new investment in production facilities until capacity utilization recovers.
• CPI rose 0.7%, but if you strip out that pesky food and energy component that nobody really purchases anyway, the core rose 0.2%.
• The MBA index increased 4.3% to 514.4 from the prior week. The increase was mostly due to a surge in refi activity, as the purchase index actually declined 9.4%. The average interest rate for 30-year fixed rate mortgages declined to 5.05% from 5.34%. Good news again for those cash strapped home owners who have yet to refinance. Unless, of course, they can't get a decent appraisal, which is a whole other story.
• Intel reported a loss, due mostly to a $1.45 billion anti-trust fine. However, quarterly revenues were sequentially higher by 13% to $8.02 billion, although still 15% below year earlier levels. The tech giant forecast a surprisingly strong third quarter, calling for revenues to hit $8.9 billion. The positive guidance has sparked a rally in tech stocks.
• The folks over at Calpers are steaming mad and plan to take action. The California pension fund manager has filed a lawsuit against the three biggest rating agencies accusing them of "wildly inaccurate and unreasonably high" ratings. It's funny that the pension holders of California haven't filed a lawsuit against Calpers for "being too lazy to do any of its own investment analysis and depending on a rating from a firm that derives its revenues from the sellers of the securities." I find these lawsuits to be really annoying. If you're a professional investor tasked with managing money, take your job seriously and know what you're investing in. Did somebody put a gun to Calpers head and ask them to invest $1.3 billion in three separate SIVs with AAA ratings that happened to own buckets of collateral probably secured by subprime mortgages? No. They did it because it offered higher returns. Higher returns = higher risk. Sack up and face the consequences of your stupid investment decisions.

Morgan Stanley Earnings Subpar

Morgan Stanley posted a worse than expected loss of $177 million or 57 cents a share, as a dramatic improvement in the spreads on its own debt impacted its earnings by a negative $1.5 billion. Revenue slumped 62% to $3.04 billion. The company also announced it was slashing its dividend by 81%. It’s about time. Analysts were expecting a loss of 8 cents a share on revenue of $5 billion.

I’m not sure how the recent financial stock cheerleaders are going to paint this into a positive, but I’m sure they’ll find a way. I’d be hard pressed to call this earnings release anything other than horrible and the stock is actually trading lower in pre-market trading. On the other hand, with results like these, spreads on MS debt are likely to widen back out, helping the investment bank post a profit next quarter.