Wall Street Scanner Blog

By now, everything that could possibly be said about Steve Jobs’ stepping down as Apple CEO has been said, and every speculation that could be speculated has been (speculated). Will Apple lose its edge without the genius and vision of Jobs to lead it? Will the “illness discount” that investors have been factoring into Apple share prices in preparation for the day he resigned finally disappear, now that Jobs has taken the long-expected step? Will the company be able to keep churning out the kind of products that keep people waiting on long lines at Apple Stores to buy them?

View the full AAPL chart at Wikinvest

Those are all matters for the future; all we have is the here and now. And those here and now questions are pretty straightforward, for the most part. Why did Steven Jobs resign? Because of his health problems. How did investors take the news? Very well, considering the import of the move; Apple shares were down a bit, and actually bounced back somewhat. Why did Jobs decide to leave now?

Ah. There is a here and now question to be speculated on. Why indeed now? Here is some speculation on that: While the move was long-expected, it’s likely that Jobs timed it in order to ensure that Apple stock would suffer as little as possible. Announcing the resignation in the middle of August, when many investors are on vacation, would give investors time to absorb the news and get used to the idea of Tim Cook as permanent CEO.

In addition, the move comes just weeks before the expected release of the iPhone 5, which, according to many analysts, will be the biggest selling smartphone in history, by far. A recent poll by web price comparison site Pricegrabber said that 35% of American consumers – as many as 75 million people – plan on buying an iPhone 5. When the lines start to form outside Apple Stores around the world, people will be forgetting about Steve Jobs very quickly, imho. Steve Who?

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Bank of America shares have been plummeting of late, and BAC shares show no sign of long-term strength. The mood on the bank’s shares is certainly low (as seen on the Wall Street Scanner app mood screen below), and although there are likely to be rises in the share price, BAC shares have been on a long slide for the past six months – while other banks have been raking it in!

View the full BAC chart at Wikinvest

The problem seems to be one of capitalization, with analysts saying that the bank needs about $50 billion to meet new capital standards and deal with the fallout from the mortgage crisis – and if you believe Henry Blodget, that figure could reach $200 billion! BOA has already sold off most of its non-essential assets, so there’s little more that could be raised that way. And with the fall in share price since the beginning of the year, BAC’s market cap is down more than $70 billion!

So, by all definitions, it appears that the Bank of America is, as they say on Main Street, “in trouble.” We’re certainly unlikely to face a Lehman scenario with BAC (although the government is far too broke to bail anyone out, it’s unlikely that Washington would take a chance on letting as major an institution as BOA fall). So it appears that the Bank of America is safe, no matter what happens to its shares.

With memories of the Lehman fiasco still fresh, most investors would probably support government intervention to save BAC, if that’s what it came down to. I would too – but only because of the fragile economy. If this were, say, 2006, I would probably say the hell with them – they got what they deserved!

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HP announced this week that it was getting out of the computer business, nearly a decade after overcoming Dell as the leader in PC manufacturing after the 2002 acquisition of Compaq. HP actually deserves a great deal of credit for its tenacity in holding out so long in the face of Chinese commodity manufacturing (not that HP machines weren’t made in China too, but they can’t keep costs down and operate on razor-thin margins like real Chinese manufacturers do).

View the full HPQ chart at Wikinvest

The truth is that HP saw this coming, even before buying Compaq; the founders of the company opposed the Compaq purchase, and never planned to have HP compete in the cutthroat consumer market. Still, HP’s are popular computers, and the PC division accounts for a third of the company’s income. So it’s a brave decision from a business point of view as well.

So what’s next? One hint is that HP’s current CEO, Leo Apotheker, is the former CEO of SAP, which practically invented the modern concept of “the cloud” and SAAS (software as a service). Apotheker spent many years at SAP, so it makes sense that he will try to do something similar at HP.

Apotheker’s experience at SAP means that he is familiar with the areas of the cloud HP is most likely to succeed in – so it’s unlikely that he will try to insert HP into SAP’s “territory” and a CRM or similar system. That means a model perhaps more like IBM’s (actually SAP was started by former IBM engineers). As I’ve mentioned in the past, IBM, No longer dependent on commoditized hardware, has swiftly turned itself into a services company, hosting all sorts of services in the cloud. One of the company’s projects, for example, aims to bring agricultural knowhow and information to farmers in developing countries – helping them grow more food for hungry populations, and creating markets where none existed before. One of the projects allows farmers in countries in Africa, Asia, and other developing areas to build a social network where they can exchange information about techniques that work for them – and to trade, or buy and sell, equipment and produce.

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Don’t look now, but after banks in the U.S. and Europe took it on the chin over the past several weeks, it could now be the turn of Asian banks to get knocked by the markets. A report in the WSJ said that “at t least one Asian bank is reviewing its exposure to European banks as concerns mount about the euro-zone’s banking sector health.” The immediate concern, of course, is over the apparently imminent downgrade of France’s credit rating, but even without that specific event, chances are that Asian banks would begin to feel the “infection” from the credit crisis. Considering the tight-lipness of Asian banks – following the example of their governments, of course – chances are more than one bank is “reviewing its exposure.”

View the full DB chart at Wikinvest

All of the sudden, Europe is again in the spotlight – and not in a good way. For several days a few weeks ago, the downgrade of America’s credit rating gave the Europeans a bit of a “boost,” in that they could ignore their own problems for a few days, but once the downgrade was complete, the attention turned right back to Europe. This week, no one wants to touch European stocks (in general); while there have been some up days, the trend is clearly downwards. Even giants like Deutsche Bank can’t get any love from analysts.

And now, with the riots in Britain, a European watershed may have been reached. The British government has gone out of its way to portray the riots as a spontaneous reaction to the death of one person, but riots don’t spread the way they did there without deep dissatisfactions among the rioters. The cuts in Britain’s welfare state and the advent of the recession have made life harder for many, and as usually transpires in the case of relative deprivation, those who were once living well and have seen their lifestyles negatively impacted will react negatively – sometimes with violence, as was the case in England. It’s thrilling if you’re a young “yob,” but chilling for the rest of us.

What works for England will work for Greece, Spain, Italy, France, and all the other European dominoes to yet fall. The example Britain is setting for European populations who are likely to face the same lifestyle “adjustments” in the near future should be enough to give Asian bankers – and everyday investors – the chills.

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You didn’t have to be a genius to figure out that the “market” was going to go down as a result of the debt limit/downgrade crisis that has played out over the past few weeks. But you did have to be a genius to figure out which stocks were going down, and which ones were going up – and by how much. Every crisis is an opportunity, as every good investor knows. And it would have been very helpful to have a genius in your pocket who could help you find the opportunities in the the mess that was last week.
Introducing your genius: The Wall Street Scannner app!

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After the savaging the stock market took on Thursday – and despite the “good” jobs report Friday (of course “good” is a very relative term here) – it’s pretty clear that the near future is likely to reflect the recent past. After dodging the debt limit bullet last week, the air cleared a bit, giving investors a better view of what is really going on in the world this week. And they are not pleased. Not only not pleased; they are, it seems, quite fearful of what may happen next. And of what looks increasingly unlikely to happen – a robust recovery in the U.S.

View the full APPL chart at Wikinvest

“Recovery” in the U.S. means two things – spending and jobs, not necessarily in that order. Actually, it’s probably best to work on the job thing first, otherwise you probably won’t have any money to spend. Where are those jobs going to come from? Right now, in August 2011, that question is academic; the folks whose job it is to make things work have not been able to figure out how to stimulate hiring for going on three years now. Hopefully the jobs report – which said that nearly 120,000 net people had been hired – is a sign of progress in this area, finally. But even if it is, all economists agree that it’s going to take some time for the job market to recover.

The only way we are going to have recovery in the near-term, then, is when spending picks up. And that looks to be due in September, when the iPhone 5 comes out. It’s pretty sad to say that the entire U.S. economy depends on a single product – but the truth is that sentiment plays such a huge role in the current recession (ie, corporations are said to have plenty of money but are afraid to spend it, hire etc.) that a major event may be what’s need to shake the economy up and loosen the spare change in some companies that have been quite profitable, and could probably do with a little expanding.

That the iPhone 5 is going to be a major phenomenon is I think clear to everyone. This Bloomberg Business story tells of the power of Apple: “Apple now controls over 66 percent of all the profits amongst the major players in the mobile space,” and that number will shoot up in September, when the hordes attack Apple stores (and AT&T and Verizon stores) for their new phones. The market and appetite for new tech stuff is there – proven by the 25 million who have signed up in just a few months for Google+. There were fears Thursday that a bad jobs report could, single-handedly, start a new recession (the possibility was mentioned numerous times on Bloomberg). Is it so far-fetched to say that the introduction of a new iPhone and the retail excitement it will bring won’t do the opposite, and push the recovery?

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The debt limit deal may have been signed, but that doesn’t mean the people it was meant to impress – America’s foreign debtors – are happy. “The squabbling between the two political parties on raising the U.S. debt ceiling and the failure of Congress to pass a resolution so far reflect an irreversible trend on the United States’ declining ability to repay its debt,” said Dagong chairman Guan Jianzhong. “The two parities acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,” he said.

View the full MCO chart at Wikinvest

It didn’t impress the ratings agencies either – and if there’s one thing that comes out of this whole mess, it may be that Wall Street (or the government!) does something to rein in S&P, Moody’s, Fitch, etc. There are already some signs it’s beginning to happen: A story by Bloomberg last Friday proclaims that “S&P Slammed by Wall Street Over Pulled Mortgage Ratings,” after the ratings agency suspended ratings on commercial-mortgage bonds. It was a real blow to some of the biggest Wall Street players – Goldman and Citgroup – and forced them to dump a deal that was worth $1.5 billion.

It’s one thing when the ratings agencies dump on Spain and Italy – but when it comes to U.S. investment banks, it’s a different story. Despite the debt limit deal, the agencies may yet downgrade the U.S. – according to S&P, there’s still a 50-50 chance that it will happen – and Fitch is already beyond the 50-50 point in its concerns, apparently.

Obviously, it’s not just the debt; the ongoing weakness of the economy is a factor as well, as top analyst David Riley told Reuters. “The downward revisions of the GDP were bigger than we expected and a source of concern,” Riley said. “There could be a rating action which could include a revision of the outlook. I certainly couldn’t rule that out.”

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There’s an interesting article in the WSJ about currency fluctuations, and how the low dollar affects prices and profits. Companies that import commodities and whose main customer base is in the U.S. are getting creamed, as the cost of commodities continue to rise – mostly due to the weak dollar – while companies that sell abroad are able to at least somewhat offset those high commodity costs, by getting more dollars for the same amount of income in foreign currency.

View the full CL chart at Wikinvest

The article names a few companies in the latter category, including Caterpillar, Kimberley-Clark, and Colgate-Palmolive. “Revenue at companies with strong export sales, such as Colgate-Palmolive Co. and Caterpillar Inc., are getting a lift from the weak dollar, while those with heavy expenses abroad and no offsetting revenue there are being hurt. As the dollar loses value, profits earned abroad fetch more when converted into dollars,” the article says.

But that adjustment is not the same for all companies. For example, the article says, Conoco-Phillips said the weak dollar might hurt its ability to fund projects in places like Asia, Europe, and Canada. But with oil prices higher on the world market, the company might see an offsetting benefit.” Emphasize the “might;” oil keeps going up, and as bad as business is in the U.S., it’s even worse in a lot of other countries where Conoco-Phillips might have projects (Africa, developing countries in Asia, etc.). Also many of these overseas projects are government connected, and of course governments expect special deals from foreign companies that seek to do business with them.

The consumer sector is a much better place to see this offset effect. Colgate-Palmolive, for example, said Thursday that its second-quarter net income rose 3 per cent from a year ago. Sales were down in the U.S. and Canada – about 3% – but up in all other markets. Higher commodity prices impacted negatively on income, the company said, but that was offset by the higher profit from non-US sales. The same seems to hold true for the other consumer products companies cited in the WSJ article, including Kimberley-Clark and Coca Cola.

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