Farrell: Touching Bottom in this Bear Market?
Chief Investment Officer, Soleil Securities
Four out of five major banks have reported better than expected earnings. Wells Fargo even went so far as to raise the dividend. Bank of America started Monday off with a solid beat and a prediction that the recently closed Countrywide acquisition will add to earnings this year.
That's quite a statement when you figure the mess the mortgage market is in. But at a purchase price of $3 billion BAC must figure they have room enough between that price and the stated book value to eat a lot of bad loans. Oil, although up a couple of dollars on Monday, acted well when you take into account that the Iranian talks over the weekend went nowhere and there are a couple of storms that could grow into hurricanes.
So just as it looked the bear market rally could continue, the floor fell out. American Express reported a significant earnings miss after the close and noted consumer spending slowed even among the companies "established members with excellent credit." Texas Instruments earnings were only a tad light but they said chip weakness was spreading to analog chips (not just wireless chips) and analog chips are used in everything from consumer electronics to industrial applications. Apple also issued a weak outlook. All these stocks, along with Merck and Schering-Plough, which shared a failed drug test, were down sharply in after hours trading. Look for a continuation of the bear market as economic weakness appears to have caught up with what had been strong non-financial earnings.
But all is not lost. The average bear market shows a decline of 30%, but then has an average 30% plus bounce when the bottom is reached. We are off more than 20% so it's possible the end is in sight. While it may take more time for the financials to show earnings growth, the stocks will turn long before the earnings bottom is reached. In the S&L crisis in the early 1980's 1,400 banks failed. But, says J.P.Morgan's most recent letter, the stocks bottomed and turned before half of the failures even happened. The banks are now priced at 1 times tangible book value, the same as in 1990.
Jason Trennert, my oft quoted strategist, calculates that dividends on stocks exceed the yield on 3-month Treasury bills. That has happened two other times in the last 50 years and both coincided with major market bottoms.
And there is an ocean of liquidity sloshing around. InBev is thinking in euros but it still is buying BUD for $52 billion. Roche, another euro thinker, bid almost $40 billion for the shares of Genentech it doesn't already own. Ed Hyman mentioned that Christie's and Sotheby's have sold more than $7 billion in art work already this year. Corporate America is for sale at bargain prices.
Addendum: Wachovia reported what most are calling a negative surpise. But with a new CEO and$15 billion in goodwill sitting on the balance sheet from the Golden West acquisition, I think any report at all is ok. Robert Steel, the new CEO, I'm sure took every hit the auditors would allow to try to get this behind them. The drastic dividend reduction is unfortunate, but was inevitable considering the mountain of bad debt they need to wade through.