All Things in Moderation

Vital Statistics:

The earnings parade continues. Bank of America (BAC) posted 3Q income of 56 cents a share, mainly on one-time items and accounting gains. They continue to deleverage – they shrunk the balance sheet $42B QOQ and have increased Tier 1 capital to 8.65%. I don’t see any mention of Durbin and the dreaded $5.00 debit card fee in the press releases. Maybe they will talk about it on the conference call. The stock is up a couple of percent pre-market.

Goldman reported a loss for the quarter. Writedowns on investments drove a lot of the losses. Sales and Trading revenues were lower as well as investment banking. Given that the stock market rolled over early in the quarter, these numbers should not have been a surprise. GS is up a buck pre-open.

Other companies reporting today: JNJ, KO, MRO, UNH, EMC, CROX

In economic data, the Producer Price Index came in higher than expected. China’s GDP came in slightly lower than estimates.

The WSJ has a story this morning talking about the lack of liquidity in the equity and bond markets. Decreased liquidity is a bear-market phenomenon, as lower prices beget lower activity. Hedge funds are sitting on their hands waiting for redemption notices at the end of the month. The overall decrease in sales and trading commissions means that banks aren’t going to take risk to facilitate customer orders for all but their best customers. Perhaps we are seeing the downside of the changes made in the late 90s – the balkanization of stock exchanges, the reduction of bid/ask spreads to pennies, and the decrease in commissions. In bull markets, people can move in and out of the market with ease, and these liquidity providers (market makers, the NYSE specialist) are viewed as unnecessary costs of trading. However, in a bear market people start to miss them. IMO, the flash crash would have been an unlikely phenomenon under the old regime. Is there any chance that we go back to the days of 1/16 bid – ask spreads, 3 cent commissions, and the NYSE specialist? Probably not. But it is becoming clearer that we gave up something in order to get penny spreads and sub-penny commissions.

What is the new battleground stock these days? Green Mountain Coffee Roasters. David Einhorn (who got it right about Lehman Brothers) was at the Value Investing Congress with a 110 page presentation ripping GMCR. This is one of those classic big battles in the markets – the value-driven hedge fund manager vs mutual fund managers starved for a growth story. We have seen this battle before in major flame-outs like Krispy Kreme and Enron. I don’t have the slides, but here is the WSJ story.

Further to yesterday’s energy discussion: WSJ It’s Official: ‘Age of Shale’ Has Arrived Money quote:

“You certainly have to record the discovery and the exploitation of resources from both oil and gas shales as one of the great wealth creators in American history,” said Ralph Eads, vice-chairman of investment bank Jefferies & Co., which has advised on more than $75 billion worth of shale deals over the last three years. “It looks to be the economic equivalent to any of the big technology innovations.”

Could be. And as more and more countries eschew coal and nuclear for electricity generation, the US could be shipping LNG all over the world and not only become energy independent, but a net energy exporter. Middle East geopolitics are going to change in a big way.

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