It seems we’re getting just enough decent earnings reports to keep things interesting. And of all the unlikely suspects, US Steel (NYSE:X) is near the top of the list.
It goes almost without saying that steel should not do well in a global recession. But US Steel beat Q4 revenue expectations handily. (Earnings per share is not comparable due to a bunch of one-time items.)
Results were mixed with other steel companies. Nucor (NYSE:NU) beat on revenue and missed on earnings, a tell-tale sign that prices are suffering. AK Steel (NYSE:AKS) also beat on revenue and missed (badly) on earnings. But unlike Nucor, which rallied 6%, AK Steel sold off 8%.
*****It is a stock-finder’s market. You can’t rely on strong sectors. There basically aren’t any. Rather, investors have to find the strong companies. Like Apple (Nasdaq:AAPL) instead of Microsoft (Nasdaq:MSFT), or American Express (NYSE:AXP) instead of Bank of America (NYSE:BAC).
Now, I used a couple banks here for a reason. Because I wanted to continue with Nouriel Roubini’s bank nationalization plan I mentioned in yesterday’s Daily Profit. As if we need another reason to not own financials (other than certain regional banks). This is a big one. If the government does consider this option, and there are compelling reasons to think it could be a good solution, it will be bad for stockholders.
Just look at the investors who believed Paulson when he said he wouldn’t take over Fannie Mae and Freddie Mac (are you listening Bill Miller?). Those shareholders paid the ultimate price of a bad investment. Not that common stock would be cancelled. But it would be massively diluted and I think it’s safe to say that these stocks would never get close to their former highs.
I’m not saying banks will get nationalized. But I see no reason to own them.
*****In fact, it appears the "bad bank" solution is gaining traction. Bank stocks are certainly responding well to the idea today. And it’s encouraging that stocks are reacting positively to the mere mention of solutions. Of course, it also sets up the potential for disappointment later.
There aren’t too many details about how the bad banks will operate, which for clarity’s sake, I’m going to call the "bad debt banks." They will be used to buy bad debt from existing banks like Bank of America or Citigroup. (As an aside, it would not be accurate to call these "good banks" as opposed to the bad debt banks that will buy the bad debts.)
That means these bad debt banks will need to be funded. And there will be dilution issues for the banks that transfer bad debt. It’s also likely that some banks will be completely absorbed by the bad debt bank. And finally, it’s not likely that consumers will rush to borrow money once balance sheets are improved.
For those reasons, despite the nice price action today, I still don’t want to own financials.
*****Finally as I told you Tuesday, trading strategists for TradeMaster Daily Stock Alerts, Benson George and Jason Cimpl, are doing another video conference on February 4, 2009.
In addition to sharing their insights on investments in gold and biotech, they want to open up the forum for some viewer questions. So if you’ve got any burning investment or economic questions, now’s your chance to ask these two top-notch analysts. Here’s a link where you can sign up for the video conference and enter your question. Please feel free to ask more than one.
And again, the TradeMaster video conference will be held Monday, February 9, 2009 at 6 pm ET. And of course, it’s completely free.