Green Across the Board, but Bank Earnings 'Very Messy'
Bad news is good news in China: China gross domestic product growth is slowing...so why is the Shanghai Index up 4.2 percent today, its biggest one day gain in months? Because: 1) fourth-quarter GDP of 8.9 percent (slowest in 10 quarters) was slightly better than expected, but more importantly; 2) China has been dropping its bank reserve requirements, making more money available to lend, and it is likely to continue doing so despite inflation worries.
And what about all those heavily indebted local governments, still burdened by the last round of infrastructure spending a couple years ago? Maybe they can sell a few thousand bridges.
Europe: Sovereign debtyields fell in Spain. That country sold 4.88 billion ($6.2 billion) euros of 12-month and 18-month paper at a yield of 2.049 percent and 2.399 percent respectively, about half of what it cost them for the same securities at the height of the crisis in December.
Elsewhere:
1) Takeaway from bank earnings so far: "Very messy," one bank stock trader said to me.
The "good news" story being pushed by bulls is this: 1) commercial and industrial (C&I) and consumer lending continues to grow; and 2) credit trends showing continued improvement.
Watch out for waving the mantra of "loan growth," however. Much of the loan growth seems to be capital markets driven....they are rolling over C&I loans and syndicating them, but that's not a dramatic increase in real loan demand.
Mike Mayo at CLSA noted this in a note out several days ago: "An estimated half of the commercial loan increase reflected syndicated loans, mostly related to financial engineering, such as efforts by corporations to pay off bonds with new bank loans."
And what about credit trends showing improvement? So now they are releasing reserves, which goes back into earnings. That's fine, but it's not real revenue growth.
Let me make it simple for you: It's really hard for banks to make money. The yield curve is still flattish...banks are flooded with deposits with not a lot of places to use the money — 0.8 percent on five-year paper? — and there's talk about loan growth, but it's very modest (Wells Fargo was in low single digits).
Get it? There's no margin in new loans, volumes are terrible, and there's still low economic activity.
What about regional banks vs. international money center banks? The regionals are OK, just not great. Wells fargo is OK, USB is OK...they don’t have the big international headlines...it's just that estimates are not likely to be going up dramatically. They are well capitalized, credit is slowly improving, they're getting through housing issues...essentially, they're muddling along.
The most important fact: Earnings estimates for regional banks are higher for 2012, but not in the stratosphere. Wells Fargo, for example, is supposed to earn $3.20 this year from $2.82 in 2011. That's achievable.
That's a lot more doable than Goldman Sachs...Goldman made about $4 last year (estimate is for $1.23 for the fourth quarter, which is out tomorrow). Estimates are for $11.71 this year. $11.71!
And look at JPMorgan Chase. The 2012 estimates are for about $4.78....but you barely have a $1 quarterly run rate now ($0.90 in the fourth quarter)...that's a $4 number.
What's this all mean? It means 2012 earnings estimates for the big banks are likely too high, unless there is some huge spurt in the economy in the coming months.
2) Cruise ship stocks tumble after tragedy off the Italian coast.
Carnival shares plunge 16 percent in pre-market trading after one of its cruise liners, Costa Concordia, ran aground off the coast of Italy Friday, killing at least six. Carnival estimates the disaster will cost the cruise operator up to $95 million this year. Morgan Stanley downgraded 2012 earnings expectations 30 percent yesterday, as sales from the current peak cruise-booking season are estimated to be lower-than-expected.
Carnival peer Royal Caribbean Cruises feels the ripple effect this morning, as shares slump 7.3 percent. Both Carnival and Royal Caribbean were downgraded to "neutral" from "positive" by Susquehanna, which cut estimates on the cruise operators and slashed stock price targets amid expectations of lower yields in 2012.
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