Farrell: Of Banks and Oil Seepage

There have been any number of lists produced by analysts with their bets as to what banks will need how much capital and what banks will cut dividends by X amount and yadda yadda yadda.

Wells Fargo was highlighted by quite a few and they surprisingly raised the dividend last week which by most books would mean their capital base is secure. That's probably a good thing since raising new capital will be tough. A lot of smart investors have been badly burned by moving in too soon. Citadel is off 40% on its investment in E-trade, Abu Dhabi off about the same on its CITI buy, Kuwait off almost 50% on Merrill and TPG off much the same on its buy into Washington Mutual (Business Week, July 28). Sooner or later even the most optimistic will back off and let someone else take a turn at bat.

Bank of America and Wachovia report this week and their results will go a long way to answering the question how long this rally might last. We are in a bear market and counter-trend rallies are sharp and steep, but, all too often, brief. If these two can mildly surprise as Citi did last week with results that beat very negative expectations we will probably move higher. I would bet that BAC has a better chance of helping than WB. The board at Wachovia saw the oncoming train wreck and tossed the CEO overboard. The new guy, Robert Steel, has an enviable resume and an impeccable reputation. He didn't have time to analyze anything before he took the job, but, rather, jumped at the challenge. A smart guy like him will take a hatchet to the balance sheet and income statement to rid himself quickly of the last guy's burdens. Can't be good news coming from WB.

There was decent news from GE when it reported a week ago and the stock has shown a little life, very little. Jeff Immelt is coming under increasing fire, but, first quarter disappointment aside, he has put up good numbers. The July 28th issue of Business Week reminds us that GE has shown 13% revenue growth the last five years and 14% earnings growth. This year will be at best flat, but this is an "interesting" year. Immelt has bought $88 billion in mostly high tech assets and has sold $55 billion in less attractive businesses. GE's dividend yield is 4.4%, a bit higher than a 10 year Treasury. And, I figure GE will raise the dividend regularly for the foreseeable future. I'm long GE and think it's a very attractive play.

There was a very interesting guy on Larry Kudlow's show Friday. William Rogers is a former avowed anti-drilling advocate from California who has, as Sir Larry put it, had a burning bush experience and has seen the light. Mr. Rogers has a very good sense of humor, took the kidding well, and made some good points. His organization, "Stop Oil Seep", figures that there is the equivalent of a 1969 Santa Barbara oil spill occurring every year from natural oil seepage along the California coast, and the equal of an Exxon Valdez spill every four years. His solution is to drill offshore Santa Barbara and the resulting release of pressure will go a long way to stopping the seep. When I looked up the web site, SOS (Stop Oil Seep) figures that 1.8 billion barrels of oil could be produced starting almost right away since the oil was discovered long ago and needs to be developed. At current prices, tax revenues to the State of California would total $1.6 billion over the life of the field. Arnold ! Are you listening ?