Wells Fargo is relatively upbeat about mortgages and margins in today’s post-earnings conference call
It was never about last quarter’s earnings. So while it was swell that Wells Fargo (WFC) beat Wall Street earnings estimates for the second quarter by 5 cents (at 98 cents a share) in results reported after the close yesterday, July 11, the real good news came in today’s relatively upbeat conference call in remarks about next quarter and the remainder of 2013.
The bank, a bellwether for the mortgage and housing sectors, said that looking forward it remained optimistic on the economy. Higher interest rates would indeed cut into mortgage originations and mortgage lending volumes would be down in the third quarter—directionally that is what investors expected to hear—but the deterioration described by the company didn’t sound too scary. Mortgage originations in the third quarter would decline, the bank guessed, to the vicinity of $100 billion versus $112 billion in the second quarter. (The $112 billion for the second quarter was up from $109 billion in the first quarter of 2013.)
Other metrics that had worried Wall Street going into the earnings report and the conference call got the same combo treatment of downward trend but not at a scary pace. Read more
Earnings season for the second quarter starts officially today when Alcoa (AA) reports after the close of the New York markets.
The quarter has shaped up as a major test for U.S. stocks. Analyst estimates call for earnings growth of just 1.8% this quarter for the stocks in the Standard & Poor’s 500 stock index, according to Bloomberg. Far and away the highest expectations are for the financial sector where earnings are projected to grow by 17%. Take away that performance by financials and the picture for the rest of the S&P 500 turns negative with earnings projected to drop by 1% for the non-financial stocks in the index.
With expectations for the current quarter so low guidance for the third quarter and the rest of 2013 will be crucial for setting market direction. Right now analysts are projecting 5.5% earnings growth for the third quarter and 11.2% for the fourth quarter. Typically earnings projections fall as the quarter in question approaches so everyone is expecting that these growth rates will get trimmed.
The question, though, is by how much?
Earnings in the first quarter grew by just 1.8%. Six months before the quarter closed analysts had projected 8.7% growth for the quarter.
Earnings from Alcoa won’t move the market. The company is expected to show a continued struggle with slow demand for aluminum and global over capacity in the industry.
But Alcoa’s read on global demand for aluminum will set the tone for earnings reports to come from other commodity producers. When it reported first quarter results back in April, the company held its forecast for global demand growth in aluminum at 7% and reduced its projections for aluminum supply surplus from 535,000 metric tons in the fourth quarter of 2013 to 155,000 metric tons in the second quarter as some producers closed capacity. A reduction in either that 7% demand projection or in the gradual reduction in surplus supply in the industry would start earnings season badly for commodity stocks.
However, given the high expectations for earnings growth at financial companies, Friday’s earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC)—both before the market opens in New York—are far and away the big earnings events of the week. Read more
Nothing surprising in today’s announcement from Citigroup (C). After all one reason I added the stock to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ on April 17 was the expectation that the company would announce a significant share buyback program relatively soon.
Today the company’s board of directors voted to continue, as expected, the company’s token 1 cent a share quarterly dividend (payable to shareholders of record as of May 6) and approved the purchase of $1.2 billion in stock through the first quarter of 2014.
The stock repurchase became possible after Citigroup passed the Federal Reserve’s last Comprehensive Capital Analysis and Review (CCAR.) The size of the purchase is roughly enough to offset the dilution created by the company’s annual stock grants so it’s not a major support for the share price. Instead it’s significant as a milestone on the bank’s post-financial crisis journey back to the status of an average bank.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in Citigroup as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Citigroup (C) is nowhere as good a bank as the one I just sold—Australia’s Westpac Banking (WBK)—out of Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ , but Citigroup does have one major advantage: it is still in the relatively early stages of digging itself out of the mess the global financial crisis left behind. And that means it has considerable upside if all it does is perform like an average bank.
So, for example, in the first quarter, reported by the bank on April 15, Citigroup reported that the net loss at its “bad bank,” Citi Holdings, fell by 20% year over year to $795 million. And, finally, Citigroup decided that the market for the $86 billion in North American mortgages held by the bad bank had improved enough that it could release some of the reserves–$375 million—that it had set aside against losses on these mortgages. Read more
I’m going to take advantage of today’s bounce (or whatever) to recommend selling shares of Westpac Banking (WBK in New York or WBC.AU in Sydney.) More specifically, I’m going to recommend selling the shares of this Australian bank out of capital gains oriented portfolios such as my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . I’d keep the shares, however, in income oriented portfolios such as my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ for a while longer on the 5.31% yield
I think the yield is attractive and safe. I just don’t see much upside for the share price. Especially with the market seeing the rebirth of fears about slowing economic growth in China. When China catches a cold these days, Australia sneezes.
The problem, basically, is that Westpac Banking has run so far ahead of its banking peers that the shares are susceptible to stagnating or even retreating here. Read more