Bank of New York missed on the top and bottom line with earnings of $0.42 EPS versus $0.52 estimates; revenues were down over 5% to $3.54 billion versus the $3.74 billion estimate.  Assets under custody and administration rose 3% to $25.8 trillion; Assets under management were up 8% to $1.26 trillion.  The company talked up general uncertainty in the financial markets and lower levels of client activity.

State Street reported $0.93 EPS after charges versus $0.94 EPS estimates; revenue rose by 13% to $2.315 billion versus estimates of $2.4 billion.  The company ended with a tier 1 common ratio of 16.9% and it has submitted its 2012 capital plan to the Federal Reserve Bank with plans for dividends and our share repurchases.

Bank of New York is down 3.6% at $20.49 and State Street has not yet started trading and we have not yet started seeing early indications in the early pre-market with about two hours until trading opens in New York.

JON C. OGG

We have compiled basic earnings previews and shown Thomson Reuters estimates from the following: Goldman Sachs Group Inc. (NYSE: GS); State Street Corporation (NYSE: STT); Bank Of New York Mellon Corp. (NYSE: BK); U.S. Bancorp (NYSE: USB); Northern Trust Corporation (NASDAQ: NTRS); American Express Co. (NYSE: AXP); Bank of America Corporation (NYSE: BAC); Morgan Stanley (NYSE: MS); and Capital One Financial Corporation (NYSE: COF).

Goldman Sachs Group Inc. (NYSE: GS) is set to report earnings on Wednesday morning and the earnings estimates have been coming down more than just marginally ahead of the expected earnings report.  It is no longer expected to have the name “Golden Slacks” attached as a nickname right now.  The current target is $1.24 EPS on $6.54 billion in sales, but the earnings targets were above $2.00 EPS recently and the street expected almost $3.00 just about 90 days ago.

State Street Corporation (NYSE: STT) is set to report earnings on Wednesday morning and the consensus estimate for the trust and custodial bank is expected to rise about 8% to $0.94 EPS.  Bank Of New York Mellon Corp. (NYSE: BK) is set to report earnings on Wednesday morning and the earnings estimates are $0.53 EPS and $3.75 billion in revenues.  We will be waiting to see if any of the charges to trust and custodial customers taking the cash holdings operations to a cost rather than as an interest bearing account will have made a difference.  That seems to have gone away but it may have just been lost in the shuffle.

U.S. Bancorp (NYSE: USB) is expected to report earnings on Wednesday morning.  The estimates are $0.63 EPS on $4.76 billion in sales.  Northern Trust Corporation (NASDAQ: NTRS) is also due Wednesday morning and estimates are $0.68 EPS and $972.3 million.

American Express Co. (NYSE: AXP) is due on Thursday after the close and earnings estimates are $0.98 EPS and $7.92 billion in sales.  As with the rest of the lenders and credit cards, we expect to hear continued improvements in credit metrics regarding the customer base.

Bank of America Corporation (NYSE: BAC) is due to report on Thursday morning.  The most unpopular of the big ‘too big to fail’ money-center banks in America, has a consensus earnings estimate of $0.23 EPS on $24.08 billion in revenues.  This has been the best DJIA stock so far in 2012 even including the last two trading sessions.  It is a bit more than just interesting that earnings estimates have ratcheted higher over the last ten days when estimates elsewhere have been cut so much in banking.  The huge discount to book value is again likely to be less material than in years passed.

Morgan Stanley (NYSE: MS) is set to report on Thursday morning as well.  Long gone is worrying about the relative book value and long gone is the comparison to Goldman Sachs.  Estimates are for a loss at -$0.57 EPS and $5.57 billion in revenues.

Capital One Financial Corporation (NYSE: COF) is due to report earning on Thursday and this is the credit card bank “for the rest of America.”  The earnings report could be wildly far off of estimates because the bank is in the process of acquisitions which could greatly skew the headline numbers.  A fresh SEC filing showed that monthly data showed a continued improvement in default rates and in late payments in December. The consensus estimate is $1.55 EPS and $4.08 billion in sales.

JON C. OGG

We will be paying extra attention to the money center banks of Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), and Wells Fargo & Co. (NYSE: WFC); and then there are the “bankless bank holding companies” of Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) to consider as rival trading outfits.  Then there is also American Express Co. (NYSE: AXP) with much of the same client base as Chase Banks and then the more mainstream Capital One Financial Corporation (NYSE: COF) to consider as well. On the trust bank side and fiduciary side, there is Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT).

We have added in color on each group as well as shown trading ranges, implied price targets, and the implied discounts to the stated book values.

J.P. Morgan Chase & Co. (NYSE: JPM) is the best of the large diversified money center banks to most investors and it still trades at 0.76-times its stated book value.  The stock is at $36.35, the 52-week range is $27.85 to $48.36, and the consensus analyst price target objective is $46.29. Thomson Reuters has estimates of $0.91 EPS and $23.05 billion in revenues for the quarter.  Keep in mind that estimates have ticked lower almost each week during the last quarter.

Bank of America Corp. (NYSE: BAC) was recently listed as being at well under 0.5-times book value, but the stock has been the top performing DJIA stock.  With shares at $6.87, the 52-week range is $4.92 to $15.31. The consensus target is $9.02.

Citigroup Inc. (NYSE: C) was recently about 0.52-times stated book value. Shares are trading around $31.27 with a 52-week range of $21.40 to $51.50 and the consensus price target is $41.98.

Wells Fargo & Co. (NYSE: WFC) was recently trading at 1.1-times book value, making Warren Buffett’s favorite bank stock the only of the money center banks not at a discount to its stated book value.  That is partly because the new trading rules and regulations are believed to have the least impact on it out of the money center banks.  Shares are trading around $29.62 with a 52-week range of $22.58 to $34.25 and the consensus price target is $32.37.

Goldman Sachs Group Inc. (NYSE: GS) trades at about 0.7-times its stated book value and some now expect a loss when it reports earnings.  At $99.76, the 52-week range is $84.27 to $175.34 and the consensus price target is $128.80.

Morgan Stanley (NYSE: MS) trades at a steep discount even to Goldman Sachs with a price/book ratio of only about 0.52-times stated book.  Shares trade at $17.10 and the 52-week trading range is $11.58 to $31.04.  The consensus price target is currently about $21.80.

American Express Co. (NYSE: AXP) is not at a discount to book value at all at 3.19-times book value because it is classified in such a different manner.  Shares are trading at $48.95, the 52-week range is $41.30 to $53.80, and the consensus price target is $56.63.

Capital One Financial Corporation (NYSE: COF) may not be accurate on book because of the acquisitions and changes there.  It is stated as being 0.75-times its stated book value.  Shares trade at $47.71, the 52-week range is $35.94 to $56.26, and the consensus price target is $56.85.

Bank of New York Mellon Corporation (NYSE: BK) trades at 0.77-times its stated book value at the custodial and fiduciary bank. Shares are at $21.50, the 52-week range is $17.10 to $32.50, and it has a price target of $25.33.

State Street Corporation (NYSE: STT) is at a premium of 1.08-times its stated book value for the custodial bank.  State Street;s stock is at $43.05, its 52-week range is $29.86 to $50.26, and the consensus price target is $47.36.

Price-to-book and price-to-earnings data provided by Finviz.com, consensus price target (mean target) provided by Thomson Reuters.

Many estimates have been trimmed by analysts of late for the banks and financials.  We still expect modest credit metric improvements in most of the big banks and more importantly expect improvements in customer credit metrics to have improved again.  The difference this quarter is that there should be a tick up in loan demand actually being met by the banks, but don’t expect any huge gains there.

Before you get too excited about the discounts to book value, this may still be more of a ceiling rather than a floor.  Cash may have to be paid out in settlements, carrying cash balances yields literally nothing, and many banking operations remain in a state of muted flux.

Lastly, look for this to impact the wild triple-leverage ETF of the Direxion Financial Bull 3X Shares (NYSE: FAS), but watch the tracking error when the markets are not open.

JON C. OGG

NYSE Euronext (NYSE: NYX) and Deutsche Boerse will try to save their merger with a case for EC regulators. (Reuters)

Fannie Mae’s CEO to depart. (Reuters)

New York State is examining the use of force-place insurance by Bank of America (NYSE: BAC) and other large financial firms. (Reuters)

Motorola (NYSE: MMI) and Lenovo will launch smartphones powered by Intel (NYSE: INTC). (Reuters)

Apple (NASDAQ: AAPL) will have substantial exhibits at the Consumer Electronics Show. (Reuters)

Kodak (NYSE: EK) sues Apple and HTC over patent infringements. (Reuters)

Some of Spain’s banks continue to make home loans despite an oversupply. (WSJ)

The Fed gives the U.S. Treasury $76.9 billion in profits. (WSJ)

Orange juice futures hit a record high. (WSJ)

Alpha Natural Resources (NYSE: ANR) reaches a settlement with miner families arising from an explosion in a Massey mine in 2010. (WSJ)

Egypt will ask the International Monetary Fund for money. (WSJ)

Fitch says that Italy is the largest risk to the euro. (WSJ)

The Hostess relationship with unions may determine whether it can stay out of bankruptcy. (WSJ)

The New Republic is for sale. (WSJ)

Tiffany’s (NYSE: TIF) sales stumble. (WSJ)

Google (NASDAQ: GOOG) launches a new product to tie search more closely to its social network. (WSJ)

The head of WebMD (NASDAQ: WBMD) departs. (WSJ)

Office owners hurt by expiring five-year leases. (WSJ)

Bank of NY Mellon (NYSE: BK) is close to settling on overcharging for currency trade cases. (WSJ)

Copper rises on demand from China. (WSJ)

Some Chinese exporters have such a large share of market that they cannot expand. (WSJ)

Investors add to positions in Greek bonds on the assumption of a bailout in March. (NYT)

Dividend increases are a sign of better corporate recoveries. (NYT)

India will again offer foreign retailers more access to its markets after reneging on an earlier arrangement. (NYT)

The head of Citigroup (NYSE: C) says banks should disclose more of the risk assessments of their assets. (FT)

Carlyle Group will list on the Nasdaq. (FT)

The battle between Intel and Qualcomm (NASDAQ: QCOM) over smartphone chips intensifies. (FT)

Microsoft (NASDAQ: MSFT) sues more Chinese companies over piracy. (FT)

Banks in the eurozone continue to cut lending despite European Central Bank attempts to change the practice. (Bloomberg)

State-funded pensions in Europe are $39 trillion short on money to fund obligations. (Bloomberg)

Germany’s economy contracts in Q4. (Bloomberg)

Microsoft says interruptions of parts supplies from Thailand will slow PC sales. (Bloomberg)

Douglas A. McIntyre

Wells Fargo & Co. (NYSE: WFC) was cut to A+ from AA- and the outlook remains Negative. Bank of America Corporation (NYSE: BAC) was cut marginally to A- from A with a negative outlook.  Ratings cuts also were awarded to Merrill Lynch, Bank of America, Countrywide, FIA, and U.S. Trust units.  Citigroup Inc. (NYSE: C) was cut to A from A+ with the outlook remaining negative. J.P. Morgan Chase & Co. (NYSE: JPM) is supposed to be the strongest of them all, but S&P downgraded the rating to A from A+.  While the Stable outlook was maintained, it seems odd that the downgrade was given without a prior Negative outlook.

Bank of New York Mellon Corporation (NYSE: BK) was cut to A+ from AA- and outlook is Negative.  State Street Corporation (NYSE: STT) was maintained at an A+ rating, but the outlook went to Negative from Stable.

The Goldman Sachs Group Inc. (NYSE: GS) was cut to A- from A with a negative outlook remaining.  Morgan Stanley (NYSE: MS) was cut to A- from A and the Negative outlook remained in place.

BofA closed down over 3% and the stock is off another 1% after the close at $5.02.  Wells Fargo is down 0.75% at $23.90, Citi is down 0.7% at $25.07, and J.P.Morgan is down 0.4% at $28.45. Both Morgan Stanley and Goldman Sachs are lower by about 1% in the after-hours session.

JON C. OGG

It still feels as though calculating a bank’s book value is a bit like calculating the cash per share of an emerging biotech that just experienced an implosion due to a poor drug candidate’s test result. The value may be eroded through time.  Now that earnings season has passed. 24/7 Wall St. has run a screen of the money-center banks, large broker-dealers, and super-regional banks trading at or under book value from the last quarter under the FinViz screen.

J.P. Morgan Chase & Co. (NYSE: JPM) now trades around $25.30 and its October earning’s book value was listed as $45.93 per share, up from $44.77 one quarter earlier and versus $42.29 a year earlier.

Bank of America Corporation (NYSE: BAC) is almost embarrassing, or actually it is embarrassing.  After a 2% drop to $5.36 today, BofA’s tangible book value per share in October was $13.22 versus $12.91 a year earlier and compared to $12.65 in the second quarter.  The stated book value per share was $20.80 in the third quarter, down from $21.17 a year earlier and up from $20.29 in the second quarter of 2011.

Citigroup, Inc. (NYSE: C) is another large discount to book value and the $24.60 price compared to a stated book value $60.56 per share and a tangible book value per share of$49.50.

Wells Fargo & Company (NYSE: WFC), Warren Buffett’s favorite bank, used to trade at a premium to book value but that now trades at 0.93-times its most recently stated book value.

A screen at FinViz gave some key banks that are large and well-known institutions, some of which have no exposure to Europe and/or the PIIGS to speak of, which are trading at a discount to their stated book value.  Others screened from FinViz are as follows, and these banks are all expected to be profitable on an operations basis ahead:

The trust and fiduciary banks are also at discounts.  BB&T Corp. (NYSE: BBT) trades at 0.88-times its latest book value.  The Bank of New York Mellon Corporation (NYSE: BK) trades at 0.66-times its latest book value. 

Other regional and large banking outfits are at large discounts too… Capital One Financial Corp. (NYSE: COF) trades at 0.64-times its latest book value.  Fifth Third Bancorp (NYSE: FITB) trades at 0.81-times its latest book value.  The Goldman Sachs Group, Inc. (NYSE: GS) trades at 0.64-times its latest book value.  Morgan Stanley (NYSE: MS) trades at 0.64-times its latest book value.  Jefferies Group, Inc. (NYSE: JEF) is just about to have a quarter-end but it trades at 0.64-times its latest book value.  PNC Financial Services Group Inc. (NYSE: PNC) trades at 0.78-times its latest book value.  SunTrust Banks, Inc. (NYSE: STI) trades at 0.47-times its latest book value.

As a reminder, our take is that even if the market were to suddenly recover, tangible book values would be the first line to watch and stated book value would be much later after that.  The book value game is one that looks and feels shockingly cheap today because the sector’s earnings power is being challenged each and every day.  Until the climate moves beyond winding down prop-trading, not going for many loans, not being able to earn money in the short-term and intermediate-term fixed income markets, and a climate where these are sued over and over for actions of yesteryear and with the regulators running the banks.
 
Value investors and investors screening for “cheap stocks” still need to look elsewhere, unless they know how to model worst case scenarios for about a year or two out from today or if they think they can quantify the regulatory, legal, and operating restriction-adjusted earnings ahead.

JON C. OGG

American Express Co. (NYSE: AXP) was over 151.6 million shares, SAME AS last quarter.
Bank of New York Mellon Corp. (NYSE: BK) was 1,793,915 shares, SAME AS last quarter.
CVS Caremark Corporation (NYSE: CVS) is a NEW POSITION of 5,661,000 shares worth $190.1 million.
Comdisco Holdings (NASDAQ: CDCO) was roughly 1.5 million shares, SAME AS BEFORE.
Coca Cola Co. (NYSE: KO) was right at 200 million shares, SAME AS BEFORE.
ConocoPhillips (NYSE: COP) is roughly 29.1 million shares, roughly the SAME AS BEFORE but it is still lower than previous quarters.
Costco Wholesale (NASDAQ: COST) 4,333,363 Shares, SAME AS last quarter after having lowered it before.
DirecTV (NASDAQ: DTV) is a NEW POSITION listed as 4,249,400 shares worth $ 179.6 million.
Dollar General Corporation (NYSE: DG) is a LARGER POSITION at 4.497 million shares worth some $169.8 million versus last quarter’s new position of 1,497,800 shares.  This one of our Top Stocks for the Next Decade.
Exxon Mobil Corp. (NYSE: XOM) was 421,800 shares; SAME AS before but lower than the 1.276 million shares originally.
Gannett Co. (NYSE: GCI) was 1.74 million, SAME AS BEFORE but decreased in prior quarters.
General Dynamics Corporation (NYSE: GD) is a NEW POSITION of 3.064 million shares worth $174.3 million.
General Electric Corp. (NYSE: GE) is 7.777 million shares; SAME AS before.  Please note that this does not include the huge preferred shares from late in 2008 that are likely to be called from Buffett later this year.
GlaxoSmithKline (NYSE: GSK) 1.51 million shares, SAME AS last quarter.
Ingersoll-Rand (NYSE: IR) was 636,600; SAME AS last quarter but still way down from prior reports.
Intel Corporation (NASDAQ: INTC) is a NEW POSITION of 9.333 million shares worth $199.6 million. 
International Business Machines Corporation (NYSE: IBM)  is a NEW POSITION and we found out this morning that Buffett’s stake is nearly 64 million shares worth well over $10 billion with an average cost of about $170 per share.
Johnson & Johnson (NYSE: JNJ) was just over 37.4 million, a LOWER POSITION versus the 42.6 million shares the June quarter and way under the peak of 62 million shares at one point in prior quarters.
Kraft Foods (NYSE: KFT) was a LOWER POSITION at 89.7+ million versus 99,467,624 shares at the June quarter and way down from before selling during the Cadbury purchase.

Despite the revelation made this morning and despite the new positions in IBM and Intel, there is still data not represented in Berkshire Hathaway’s full holdings: Confidential information has been omitted from the Form 13F and filed separately with the Commission.  It looks as though Warren Buffett was again given permission to delay or omit some of the new holdings.

PAGE TWO…BUFFETT HOLDINGS ‘L to Z’

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JON C. OGG

These 29 banks have been awarded an implicit guarantee that they are, indeed, ‘too big to fail.’ That’s the good news. The not-so-good news — at least from the institutional point of view — is that capital requirements for the banks will increase and each bank must create a plan by the end of 2012 describing how they would wind themselves down if necessary.

Boosting capital reserves presents little or no problem for any of the banks. The US banks can manage that easily by increasing their retained earnings. They’ll squawk some, but that will be mostly for show.

The requirement that each bank create what amounts to a ‘living will’ represents the real teeth in the G-Sifi designation. The rule is intended to shine a light on a bank’s lending and trading practices, and that transparency is expected to restrict moral hazard. This is far from being a guarantee that if one of these banks fails that world governments will ride to the rescue. The G-Sifi banks will have to disclose where the money is, how it’s being lent and borrowed, and how much risk the bank is really taking. Presumably, the ‘borrow short, lend long’ practices that crushed Lehman Brothers and nearly killed AIG would at least be open to inspection and criticism, if not regulatory prohibition.

For example, recent reports provide very different estimates of US banks’ total exposure to the debt of Portugal, Ireland, Italy, Greece, and Spain (the PIIGS or, more genteelly, the GIIPS). The total direct exposure of five US banks to Greek debt is about $8.6 billion. Not much in the great scheme of things. Here’s a chart from Citigroup published at the Financial Times Alphaville blog:

However, when derivatives and other financial instruments are included, these banks’ direct exposure to the PIIGS debt was estimated at $175 billion, and the Bank of International Settlements set the total at around $725 billion. This figure is disputed by the US banks, which prefer to net out their exposure over their entire portfolio. They come up with a figure of about $50 billion.

The 29 G-Sifi banks won’t be able to account for their derivatives in a way that best suits the individual bank. The FSB will force the banks to follow a single set of rules that should provide figures that can be examined and compared.

For investors and regulators, transparency is a wonderful thing. For banks, it is less so. In the coming months, look for at least some of the G-Sifi banks to try to get out from under the designation. These banks will have figured out that being TBTF is a curse, not a blessing.

Paul Ausick

Groupon (NASDAQ: GRPN) raises $700 million with its IPO. (Reuters)

Sales at large chain stores are weak as shoppers worry about the economy. (Reuters)

Poor economic conditions may hurt state tax receipts for another year. (Reuters)

The U.S. says China and Russia both used cyberspying techniques to break into American-based security systems. (Reuters)

AMD (NYSE: AMD) to cut 10% of its staff. (Reuters)

MF Global may have disguised it debt load. (WSJ)

Google (NASDAQ: GOOG) may start a pay TV service. (WSJ)

LinkedIn (NASDAQ: LNKD) says it will sell more shares; the stock falls sharply. (WSJ)

BNY Mellon (NYSE: BK) is in conversations with the government over settlement of fraudulent currency trading. (WSJ)

Freddie Mac asks the government for another $6 billion. (WSJ)

As a scandal over possible illegal payments grows, Olympus delays earnings. (WSJ)

The U.S. asks for China’s help regulating food safety as more is exported from the People’s Republic. (WSJ)

The IMF may print more of its special currency to be used for the eurozone crisis. (WSJ)

ArcelorMittal says problems in Europe may blunt steel demand. (WSJ)

Eastman Kodak (NYSE: EK) may need to raise more money. (WSJ)

Starbucks (NASDAQ: SBUX) earnings rise and the firm says it will open more locations. (WSJ)

The number of IPOs originating in Hong Kong has dropped. (WSJ)

Google changes its search algorithm to bring more relevant results. (NYT)

The ECB cuts rates due to recession concerns. (FT)

AIG (NYSE: AIG) reports its biggest loss since 2009. (FT)

Douglas A. McIntyre

Private financial firms have positive reactions to the Obama plan to aid more homeowners with underwater mortgages. (Reuters)

Research In Motion (NASDAQ: RIMM) faces consumer suits over an outage of its BlackBerry network. (Reuters)

Sony (NYSE: SNE) buys the 50% of the Sony Ericsson smartphone that it does not already own. (Reuters)

Democrats’ $3 trillion budget reduction plan would reduce some Medicare benefits. (Reuters)

Nintendo reports a quarterly loss and cuts forecasts. (Reuters)

Sprint-Nextel (NYSE: S) may have to raise money to pay for its costs to offer customers the Apple (NASDAQ: AAPL) iPhone. (Reuters)

RIM delays update of BlackBerry OS. (Reuters)

Bank of New York Mellon (NYSE: BK) faces more charges on its fees for currency trading. (WSJ)

Credit card agencies offer programs to predict consumer behavior. (WSJ)

Freddie Mac CEO resigns. (WSJ)

UAW members approve a deal with Chrysler. (WSJ)

China rejects any efforts to raise the value of the yuan. (WSJ)

Ford’s (NYSE: F) sales efforts in Europe and Asia produce few results. (WSJ)

Dan Burke, former president of Cap Cities/ABC, dies at 82. (WSJ)

Walmart (NYSE: WMT) closes its fashion operations as it moves back to basic apparel. (WSJ)

Boeing (NYSE: BA) raises its full-year order forecast. (WSJ)

Nokia (NYSE: NOK) releases its first phone powered by Microsoft’s (NASDAQ: MSFT) Windows mobile OS. (WSJ)

Troubled MF Global (NYSE: MF) may offer itself for sale. (WSJ)

AIG (NYSE: AIG) to sell part of its piece of AIA Group. (WSJ)

New rules will force large hedge funds to disclose their financial positions. (NYT)

BP (NYSE: BP) gets approval to drill again in the Gulf of Mexico. (NYT)

EU banks will have to raise 106 billion euro as part of the region’s refinance plans. (FT)

Nintendo predicts its first annual loss in 30 years. (Bloomberg)

Douglas A. McIntyre