Company Tags: Mastercard (MA); American Express (AXP), Discover (DFS); Citigroup (c), Westpac Bancorp (WBK)
9 pm ET…January 22, 2008 — Comment on Markets, Companies & Events in the News
The stock market was a roller coaster today. The Dow fell 128 points to close at 11971. Traders considered this a bearable loss after the morning saw a 300 point drop in literally the first minute of trading – and that drop came after the Fed cut rates by ¾ of a percent, the first cut of such magnitude since 1990 when the economic fallout from the S&L crisis of the late 1980’s was just ramping up.
The S&L debacle eventually totaled $150 billion in losses to the banking system. The subprime mortgage crisis, by comparison, is already over $100 billion (based on reported losses to date) and still counting. Therefore, the market adjustment may be far from over, despite the recovery in stock prices as the day wore on. At one point today, the Dow dropped 464 points.
Despite all the turmoil, volume on the NYSE was 6.3 billion shares, only 7% higher than Friday’s 5.9 billion in volume, leading some market observers to conclude investor sentiment is not as pervasively negative as the indexes would otherwise indicate. In fact, most of the selling came from pre-market opening orders from overseas, where Monday was even grimmer than today in the USA.
For example, on Monday, when US stock markets were closed, London’s FTSE and Hong Kong’s Hang Seng Index each fell 5%. Germany’s DAX dropped 7%. One can almost consider this morning’s 464 point drop in the Dow as a mere extension of overseas market sentiment…and a natural consequence of globalization. So there may be more days like today in the weeks to come. So stay cool, and when that happens, consider buying Diamonds.
On other exchanges in the US, the S&P 500 finished down 15 points to 1311 and NASDAQ fell 48 points to close at 2292. Diamonds (DIA: $119.22) which appeared in our morning edition, was down only marginally, $1.35, or 1% by day’s end. This is certainly not the end of the world — it only means investors need to be a little shrewder in stocks purchased, or sold short.
Frankly, credit card delinquencies are a more serious problem, and for many more people, than the current crisis in mortgage. MasterCard (MA: $182.17), for example, was identified as the most compelling short sale almost two weeks ago, when the stock was at $195 (The Wide Angle, January 10th edition).
MA closed up $7 today, though still sells at a multiple of 6 times sales versus a multiple of 1.7 times sales for American Express (AXP: $43.34) and 1.5 times sales for Discover (DFS: 12.71). MasterCard’s Price-to-Earnings ratio is no less out of whack in relation to its peers at 30 times and compares with an EPS multiple of 13 for Amex and 11 for DFS.
This isn’t exactly rocket science, or original. The short interest MasterCard of 11 million shares is 8% of total shares outstanding. The short interest in Amex and Discover is 2% and 1% respectively. In addition, Fidelity Management, the giant mutual fund company, recently announced that it had cut its stockholding in MasterCard in half, to 5% from 10%.
Given the approximate dates that Fidelity sold its stock, virtually all sales were north of $200 per share. At a minimum, Fidelity grossed $1.3 billion in stock sale proceeds, meaning it is carrying the remaining 5% of MasterCard that it owns at a zero cost basis — unless it has sold more stock, which we won’t know for a few more months.
Before we wrap up for the evening, here’s an example of shrewd. Citigroup (C: $24.40) recently cut its dividend by 40%, receiving applause and kudos for its attention to balance sheet management. It would have made more sense to eliminate the dividend altogether in order to retain as much capital as possible this year, however, with new overseas investors purchasing new stock, it was probably not a viable option. Citigroup’s earnings are still a fraction of the reduced dividend.
Compare this with an Australian money center bank, Westpac Banking Corp (WBK: $110.24). Westpac trades on the New York Stock Exchange (www.nyse.com) as an American Depository Receipt, called ADR’s. ADR’s are shares of foreign companies that are deposited in the USA, and traded as one would trade any American stock. In the case of Westpac, each ADR traded on the NYSE contains five shares of the bank’s stock back home… or $22.05 apiece.
However, Westpac’s trailing 12 month earnings of $8.13 is 42% greater than its annual dividend, and it doesn’t have any foreign investors to jump through hoops for. We’ll have more analysis on this stock in a future edition, or you can complete the comparative analysis on your own. But, as we’ve written often, any individual investment strategy that does not include foreign stocks is an incomplete investment strategy.
Until tomorrow…
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