In Search of the Perfect Investment

The banks are recovering. Jump in, says Wall Street analysts.

Please don’t. There are too many cockroaches still to surface.

What is this sleight of hand reporting? They earn money on “operating” profits. But they have writeoffs which seemingly don’t count. It makes me personally sick. Writeoffs reflect losses. They are losses. You can’t have operating profits dwarfed by writeoffs. There are no profits.

Enough said. Read today’s New York Times piece. Go figure.

Bank of America, the nation’s biggest bank, announced Tuesday that operating profit rebounded in the third quarter, helped by improved credit conditions among consumers and businesses.

On a non-cash basis for the quarter, the bank reported a loss of $7.3 billion because of a $10.4 billion write-down in the value of its credit card unit, attributed to federal regulations that limit debit fees and other charges.

Without the one-time charge, the bank earned $3.1 billion, or 27 cents a share. Wall Street had been expecting earnings of 16 cents a share, according to Thomson Reuters.

Analysts said the improving credit environment was a healthy sign, both for the bank and the broader economy. The bank set aside $5.4 billion in the quarter for credit losses, $2.7 billion less than the previous quarter and $6.3 billion less than the period a year ago.

“The biggest thing is that credit quality improved way more than anybody thought,” said Chris Kotowski, an analyst with Oppenheimer. “That is the holy grail — anything else you can deal with. The one thing that kills value for banking institutions is when credit quality spirals out of control, so this should be the key to the stock doing well for the next year or two.”

Indeed, a substantial portion of the profit gain came from the expectation of lower losses among credit card and mortgage borrowers, rather than new business, as the bank was able to recapture money it had earlier set aside. It released $1.8 billion from reserves, compared with a release of $1.45 billion in the second quarter.

In recent days, Bank of America shares have been hammered as investors worried about the impact of legal challenges to foreclosures. After halting foreclosures across the country, Bank of America said Monday it was resuming the process in 23 states where court approval is required for a foreclosure to proceed.

One key worry over the last week is that investors would force the bank to repurchase now-toxic mortgage backed securities, arguing that they were put together improperly.

These so-called “put-backs,” some analysts warned, could total tens of billions of dollars, undermining earnings for years to come. But the $872 million charge recorded for put-backs in the quarter indicates the threat is manageable, Mr. Kotowski said.

In the same quarter a year ago, Bank of America reported a loss of $2.2 billion, or 26 cents a share.

“We are adapting to the regulatory environment, credit quality continues to improve, and we are managing risk and building capital,” the chief executive, Brian T. Moynihan, said in a statement. “We are realistic about the near-term challenges, and optimistic about the long-term opportunity.”

Bank of America became the third major bank to report third-quarter earnings. JPMorgan Chase reported a $4.4 billion profit for the third quarter while Citigroup reported earnings of $2.2 billion, its third profitable quarter in a row.

David Einhorn made me lots of money. He was negative on Lehmann Brothers. He sold it short. I sold it short. The rest is history. Now he’s negative on St. Joe  (JOE). Here’s the story from yesterday’s Wall Street Journal:

Einhorn vs. Berkowitz: The Rumble Over St. Joe

Let’s get ready to rumble!

Last week famed hedge fund manager David Einhorn of Greenlight Capital revealed he’s shorting Florida real estate developer St. Joe Company, arguing that the company’s properties, largely undeveloped land in the Panhandle, are worth only a fraction of what the company says they’re worth.

Given Einhorn’s notoriety, mainly for his bet against Lehman Brothers, any short position he takes will attract attention. But St. Joe happens to be a major holding of another famed manager, Bruce Berkowitz of Fairholme Capital Management. Fairholme holds 29% of the company’s stock.

We spoke to Berkowitz late Friday and his argument boils down to this: he trusts the company’s numbers.

Einhorn “basically said the books were cooked and that’s a serious allegation,” Berkowitz said. “There are auditors, a CFO and that stuff gets looked at on a quarterly basis.” For Einhorn to be correct, that would mean “the auditors are sleeping,” he added.

While Einhorn’s team made their own visits to St. Joe property – videos and pics were shown of empty streets and storefronts during his presentation to the Value Investing Conference – Berkowitz says the company should show investors around the properties.

“My recommendation is that the company should have an investors week and go through the land and let people see it all and go through every page … and let people know what was excluded from the analysis” by Einhorn, Berkowitz says.

“Reasonable people can disagree,” Berkowitz said. “He’s a smart guy, David, and every page of his documents should be well studied and understood that he’s done his done his best to show the bad and the ugly.”

This is likely the first round of this fight. Stay tuned.

This is St Joe’s stock.

Einhorn’s 139 slide PowerPoint is here. It’s fascinating It shows what you can do with Google maps and a cheap digital camera. The presentation is fascinating. Click here.

My worst trade: Neat series on CNBC.

Buffet tried to save Berkshiire Hathaway’s textile business.

Pimco’s Bill Gross didn’t lend money to Walmart in 1975.

I love the lessons. Gross stresses the importance of people. Buffet, I guess, stresses watching the inevitable.

My most popular investment lecture is the worst investment decision I ever made — starting launching Technology Investor in 2000 just as the technology bubble was bursting.

Harry Newton who wonders why none of his old girlfriends showed up at last night’s University of Sydney concert at Lincoln Center. The most fascinating “old foggie” indulgence is to find out what they did in all the intervening years and then compliment yourself on how much better you did.

Apple is down a little from last night’s “disappointing” earnings report. Great. Apple shares are on sale. They’re going much higher.