Thursday, 23 July 2009 01:00

Recent research results as earnings roll out

This earnings season has shown this quarter's research to be quite accurate. I am still bearish on the market, and the weak earnings performance coupled with the still elevated equity prices and valuations make me even more suspect. The last time this happened to this extent (well, not quite to this extent) was right before the crash. As a quick recap for the past week.

Wells Fargo, right on point, nearly to the "T":

Caterpillar, very, very close to perfection. I also believe we have caught CAT in a shenanigan or two, which I will post on later:

GS, results are on point, valuation is through the sky as I have anticipated.

And just this morning, Starwoods, whose actionable intelligence item I posted very recently: Starwood Hotels (HOT) Intelligence Note_072009 - Starwood Hotels (HOT) Intelligence Note_072009 - 2009-07-22 03:45:18 927.84 Kb. From

Starwood Hotels & Resorts Worldwide Inc.'s second-quarter earnings rose 28% on a tax benefit as world-wide revenue per available room slid sharply. Exactly as we predicted!

The hotelier also cut its 2009 earnings estimate again, this time to 65 cents a share from its prior view of $1.10. Analysts' surveyed by Thomson Reuters recently anticipated a smaller cut to 76 cents.

For the third quarter, Starwood projected earnings of 6 cents to 10 cents a share, far below analysts' estimate of 21 cents.

The weak economy has squeezed the hotel industry for some time, with timeshare businesses also under pressure. The outlook for 2009 is grim, despite efforts by hoteliers to cut costs. Hoteliers and cruise lines have offered discounts and promotions in an effort to boost slumping sales, with Starwood earlier this month offering one of the bigger ones, featuring rate cuts of up to half at nearly 600 of its global locations.

The operator of the W Hotels, Westin, St. Regis and Sheraton hotel brands reported a profit of $134 million, or 74 cents a share, up from $105 million, or 56 cents a share, a year earlier. Excluding items such as the 50-cent tax benefit, earnings slid to 22 cents from 56 cents. Starwood in April projected 14 cents to 20 cents, below analysts' views at the time. Starwood has a history of sandbagging, which analysist should be used to by now.

Revenue decreased 23% to $1.21 billion. Analysts polled by Thomson Reuters most recently were looking for $1.19 billion.

Key hotel metric revpar, or revenue per available room, fell 25% in North America and 30% internationally.

President and Chief Executive Frits van Paasschen said the company's focus on cost cutting and long-term growth strategy boosted results, despite an estimated $10 million impact from the swine flu. He noted Starwood raised nearly $1 billion to help reduce its debt in the period.

At its timeshare business, revenue from vacation ownership fell 35% and residential sales dropped 47% amid average prices that fell 24% and weak demand.

This company is in a bad way, yet had been thoroughly rewarded today for playing sandbagging games. Things are bad and are getting worse for this company, and they have clearly admitted it, yet they are able to ride beta higher.

PNC was the trainwreck that we all saw coming, several times over:

The problems that PNC, WFC, JPM, and Citi have are real, are long lasting, and have yet to be mitigated. The green shoots theorists and blinded bulls are literally gambling with their monies. Unfortunately, this is a very difficult time to make money, for rampant bullish buying is being rewarded more than actually counting assets and earnings. Every time this has happened that I know of, it presaged a market crash.


PNC Financial Services Group Inc. (NYSE:PNC), Pittsburgh's largest bank, on Thursday reported a second quarter profit of $65 million, or 14 cents per share, down sharply from $505 million, or $1.45 per share, in the year-ago quarter.

Revenue was up from the year-ago quarter, to $399 billion, compared with $204 billion. The latest quarterly figures, however, include the impact of National City, which PNC acquired in December 2008, while the year-ago figures do not.

PNC's bottom line is still being affected by its Dec. 31 acquisition of National City Corp; its credit-loss provisions were $1.09 billion, mostly due to National City.

"Our businesses performed well in the second quarter given the extremely challenging economic environment. We increased our loan loss reserves again this quarter as credit quality deteriorated with the broader economy," CEO James Rohr said in a prepared statement.

Analysts surveyed by Thomson Reuters estimated that PNC’s (NYSE:PNC) second quarter 2009 earnings will range between 20 cents and 82 cents for an average of 45 cents per share. I warned everyone. As a matter of fact, PNC is no where near out of the woods! They are in trouble for they purchased a toxic mess with taxpayer funds.

... In late May, PNC raised $624 million through the sale of 15 million shares of common stock to increase its common equity. PNC was among the nation’s 19 largest bank holding companies tested by the government to see if they were adequately capitalized to withstand worst case scenarios in a prolonged severe recession. Ten were directed to raise capital, including PNC, which was told it needed an additional $600 million. It was the smallest amount assigned to the tested banks, and the only one less than $1 billion.

Last modified on Thursday, 23 July 2009 01:00


  • Comment Link Shabba Monday, 27 July 2009 18:07 posted by Shabba

    I'm not seeing the problem with Wells. If something bad was going to happen with their portfolio it would have happened by now. The bust in CA is several years old now, and it looks like it has stopped (not saying prices are going up though). They've only had one losing quarter during all of this and supposedly their subprime stuff was all full-doc, verified income, etc. The record earnings and revenues just reported (mostly because of Wachovia addition) make me even more skeptical that they're going to have problems. Possibly their underwriting standards were much different than WAMU and the other turds?

    I don't know, hard to figure out.

  • Comment Link dkn Thursday, 23 July 2009 23:28 posted by dkn

    Another thing which unfortunately could make a difference is the fact that Wells is not truly in the "favored class". Their CEO called the stress test "asinine" and there have been a couple other instances where clashing was very visibly evident. One can also do a background search on who they've got in the key places, and I came up pretty dry when looking.

    They do not have the connections that JP has, nor Goldman. Citi has great connections to this Administration, I would say better than JP even. But look at where Citi is now. At the end of the day while these guys will not allow the system to crash, there is ZERO appetite to bail out equity holders, as it is clear this has happened over the past 12 months.

    I believe this implies a favorable setup for a negative position on a PNC and a Wells. They will have to fend for themselves more than "the others" do. I'm sure you all have been following the regional bank earnings, which have been lousy. I cannot help but imagine that when acquisition accounting floats away, Wells could be in a similar boat.

    It pains me to even have to write this post, and that Simon Johnson's call on July 14th might have been right for the right reasons more than some would like to put on:

  • Comment Link NDbadger Thursday, 23 July 2009 17:01 posted by NDbadger

    PNC's TCE seems extremely thin:

    SE-preferred- GW-Intagibles = 6,457. This gets one to an adjusted equity number (unscrubed) in excess of 40x. And a texas ratio of 85%. Is something going on with merger accounting, or are their ratios and provisioning really that extreme?


  • Comment Link 3Saints Thursday, 23 July 2009 14:46 posted by 3Saints

    Mark to market getting another look

  • Comment Link NDbadger Thursday, 23 July 2009 14:02 posted by NDbadger

    don't know if you saw this spoof on GS in the New Yorker:

  • Comment Link NDbadger Thursday, 23 July 2009 12:11 posted by NDbadger

    I agree,

    On top of the deteriorating loan portfolios, WFC will have to raise probably $25B just from when it brings the OBS stuff back on.

    I also agree that one can't fight the mkt. Maybe it is just going up because of Fed printing, and the dollar is falling apart, so what we are seeing is both going down, just the market is going up relative to the dollar (I don't know, just speculating).

    Bill Gross said in his latest letter that he is dramatically reducing his exposure to bank paper.

  • Comment Link Reggie Middleton Thursday, 23 July 2009 11:46 posted by Reggie Middleton

    PNC and WFC will probably have to do another captial raise. Their loan portfolios will continue to deteriorate for the foreseeable future. The fact that any of the banks shares or the global industrials are not tanking confirms that this market is a casino style crapshoot. It is unwise to follow the momentum game without being a quick daily trader, and fundamentals have flown out of the window. Thus, it is best for me to sit back with a strategic, manageable and hedged position and wait for reality to hit.

    Every company on the list above should have a tanking share price. There past performance was bad, guidance is either below consensus or non-existant, and their balance sheet is poor to saythe best, yet the market rises bringing many of the stocks up with it. This is exactly how the smart guys felt during the late '90's. I also remember the momentum and retail investors, not to mention the shills in the banks saying that fundamentals don't matter, things are different this time, you are missing out, yada yada. This is and extreme case of deja vu.

  • Comment Link NDbadger Thursday, 23 July 2009 11:36 posted by NDbadger

    investors are focusing on the NIM and ignoring everything else, IMO.

  • Comment Link NDbadger Thursday, 23 July 2009 11:36 posted by NDbadger

    WFC will have to do another capital raise. I'm shocked it's stock price is holding up so well. I guess we won't see the stock price react until the capital raise becomes more obvious to the broader market.

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