Telecom Earnings Update

AT&T reported third quarter earnings yesterday. As I mentioned in my Telecom post, the company's performance was excellent during the recession.

The numbers yesterday showed continuing strength with high revenues and great statistics. Here are some highlights:AT&T earnings beat the Street by 4 cents -.54 actual earnings Per Share versus the expected .50.

o Revenues - $30.9 billion for the period. o Two million increase in total wireless subscribers - highest third-quarter net gain in the company's history. o 4.3 million postpaid 3G integrated wireless devices added to AT&T's network, the largest quarterly increase in the company's history; integrated device growth included 3.2 million iPhone activations. o 33.6 percent increase in wireless data revenues to $3.6 billion. o 240,000 net gain in AT&T U-verseSM TV subscribers — up from 232,000 added in the year-earlier third quarter — to reach 1.8 million in service. o 18.7 percent growth in wireline IP data revenues driven by AT&T U-verse expansion and growth in advanced business products. o $9.7 billion cash from operating activities in the third quarter and $25.5 billion year to date."

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C. Cohn

Telecoms Decline As The Market Climbs

The major indexes rallied over the last six sessions, approaching twelve month highs established in September. This was bolstered by the first government to raise interest rates in over a year - the Australian Central Bank, and Alcoa, the traditional first Dow component to report earnings, beating analysts expectations by sixteen cents.

The Telecoms did not participate in the week long rally - why? On Wednesday, AT&T surprised the industry by announcing that they will allow Apple’s iPhone to carry VOIP (Voice Over Internet) applications, such as Skype, over AT&T’s 3G Network. This was applauded by analysts and financial journalists, but the public reacted adversely, dragging down the sector each day since the announcement was made. The investor knee-jerk reaction was due to the concern that long distance earnings will suffer, because customers will use Skype to make overseas calls for free, avoiding the regular per minute charge that is a lucrative source of income.

The same kind of reaction occurred when AT&T decided to subsidize the purchase of the iPhone, resulting in an upfront hit to their revenue stream. This strategy and the opening up of voice Internet applications on their network are both designed to meet customer demands and more importantly, as a long term goal, attract new subscribers. After all, you cannot use the iPhone in this country, unless you sign up to AT&T, and you will not be able to use Skype on your cell phone for international calls, unless you become a subscriber as well. Currently, Verizon and the other Telecoms are not offering this service, so AT&T has a jump on the competition. It is even rumored that AT&T may partner with Google in the near future, to further solidify integrating Internet applications with wireless phones.

Although there is stiff competition and declining revenues in the wire-line area, the major Telecoms have been consistently performing well through the recession. Last quarter, AT&T earned $3.2 Billion, with total revenues of $30.7 Billion. Verizon earned $3.1 Billion with revenues of 26 Billion. Not many companies can make such a claim during these tough times. They are basically cash cows with many sources of income and increasing wireless bases, both consistently paying dividends, with current yields over 6%. Try getting a return like that at your local bank!

Earnings season is upon us and AT&T will be reporting on October 21 - Verizon on October 26. We will be watching closely to see if they can continue their successful track records.

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DISCLOSURE: Charlie Cohn owns shares of AT&T and Verizon common stock.

C. Cohn

Banking on Geithner

Part 1 of 2

Last week marked one year after the fall of Lehman Brothers, pundits, newspapers, and financial news programs, both Cable and Network, felt compelled to weigh in on where the economy stands today, compared to where we were then. For whatever it’s worth, I believe we are on the path to recovery, though mixed indicators tell us that we should fasten our seat belts, because there will be bumps in the road. I was surprised to learn that the majority of Americans polled by CNBC believe that we are poised for another collapse. This is actually one of the questions Treasury Secretary, Geithner, was asked in the “ Banking On Geithner” special, among many other tough questions from the audience. After all that we’ve been through as a country, the American people have a need to know. The Treasury secretary was confident in his delivery when he stated that he did not see another collapse of the financial system. He added “It is in our power to prevent it. If we stick to it until we get this economy moving again”.

The past year felt as if the rug was pulled out from under us. With steep declines in pension and mutual funds, the loss of millions of jobs and housing values shifting below their underlying mortgages (often called upside-down mortgage), we have earned the right to be concerned about the future. Millions of hard working Americans believed in the American Dream, only to find that the country narrowly averted a nightmare, the likes of which we have never seen. To quote Timothy Geithner, “The financial system almost fell off a cliff.” I was relieved to hear the words that echoed my sentiments as it was unfolding last year. The “Banking on Geithner” special was aired on September 10th on CNBC, in a Town Hall-type setting, hosted by Erin Burnett and Steve Leisman. There were a litany of questions that were probably never asked but the ones that did make it to the floor were all about security, stability and taxes. They were all worded differently and maybe even sounded more eloquent, but in the underlying issues were the same; security, stability and taxes.

Geithner, who was referred to as the country’s chief financial officer, explained to a captive audience that the country went too long living beyond our means and built up too much leverage, so it will take a while to fix the economy. He went on to explain that we were behind the curve and did not move quickly enough, in response to the issues concerning the government’s over spending, and involvement in the private sector. In other words, the drastic measure that were taken, were necessary. He’s right. It was way too late to completely avoid the inevitable. At the time it was obvious to me and probably others in the financial industry, that the bail outs were desperate “last minute” measures to save the Country from a fate that we cannot even imagine. At this point last year, the country financial system was about to slip into a comma, the bail outs were efforts to keep the economy from flat-lining. The media coverage fostered panic and speculation, while the subsequent press conferences held by the Bush administration appeared to be strategies to improve global perception, and damage control.

Capitalism had spun out of control. Meanwhile, Investment Banks, Commercial Banks, Mortgage companies and Hedge Funds had to have known at least 18-months prior that their housing portfolios, loans, and mortgage backed securities represented high risk transactions. There were other high risk derivative positions that added to the losses. But like gambling addicts they irrationally thought that something, or some event would miraculously turn the losses around and no one would ever know. Further, knowing that they were sitting on billions in losses, how did they justify the distribution of bonuses - not just any bonuses, but multi-million dollar compensation packages to the folks who took excessive risks that amounted to massive losses, and in some cases, the downfall of companies. This is Capitalism at its worst. Greed has become the new four-letter-word. click for part 2

K. Reilly
Cohn-Reilly Report
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WSJ:9/18/09, “Bankers Face Sweeping Curbs on Pay”
http://www.cnbc.com/id/32372470

Banking on Geitner

Part 2 of 2

The Wall Street Journal’s September 18th article about bonuses and compensation reports that the Feds plan to curb compensation for traders, loan officers and executives on Wall Street. The front page article, talks about the new policy that endeavors to structure pay for thousands of bank employees nationwide. It is important to note that this policy will only require the approval of the Federal Reserve, not congress. Perhaps this is a good thing, considering the potential for months of bipartisan antics that would spark political debates, ultimately clouding the issue, and stalling progress.
To the question asked by one of the citizens: Given the new and deeper role the government plays in shaping our economy, do we have to reshape our Dreams? Geithner offered reassurance saying “I think the American Dream is still about freedom and opportunity”. He went on to talk about one of the reasons we had been such a productive country in the past, is that we were early in establishing universal education, the many other things that made us strong. the Secretary boasted that we were the envy of the world at one time. “That central vision is still going to be our future”. There were, of course, those questions that we've been hearing in round-table debates since the collapse of the financial market last Fall. Geithner fielded the questions with composure and confidence. One concerned citizen asked: You let GM fail, but City Bank was too big to fail? Why?: Geithner explained pension funds had already declined 30% by the time Citibank showed exposure, and also reiterated that the government failed to act soon enough. The Treasury Secretary emphasized that the American people played a role by taking on too much debt, and living beyond their means for too long. He went on to say that “you can not solve a crisis by teaching people a lesson”.


Geithner very aptly pointed out that we should be all more committed to never letting this happen again, saying “Never again commit to tax cuts without having a way to paying for them”. He went on to say we should never again finance two wars without a way to pay for them and expand health care without the money to pay for it. In response to the question asked by co-host Steve Liesman, “How much pressure are you under to dial back, and get out of the private sector?” The Secretary adamantly exclaimed “no one is going to be more eager than I am.” and he meant it. He stated that the TARP program was designed to be used no longer than necessary, adding that there are dangers to withdrawing too soon. Geithner continued saying other country’s have made this mistake in the past, which could reignite the recession and cause even more damage. The Treasury Secretary seemed to believe that the measures that were taken are working. He talked about the indications of traction and growth, citing that they already have $88 billion coming back into the treasury from TARP repayment. While predicting that unemployment will stay “unacceptably” high, Geithner stated that after two years, we now have an economy that is starting to grow, we are just at the beginning. It is going to take a while to fix this. Back to Part 1
K. Reilly
Cohn-Reilly Report
____________________
WSJ: 9/18/09,“Bankers Face Sweeping Curbs on Pay”
http://www.cnbc.com/id/32372470

Banking On Geithner

Part 2 of 2

The Wall Street Journal’s September 18th article about bonuses and compensation reports that the Feds plan to curb compensation for traders, loan officers and executives on Wall Street. The front page article talks about the new policy that endeavors to structure pay for thousands of bank employees nationwide. It is important to note that this policy will only require the approval of the Federal Reserve, not Congress. Perhaps this is a good thing, considering the potential for months of bipartisan antics that could spark political debates, ultimately clouding the issues and stalling progress.

To the question asked by one citizen in the audience: "Given the new and deeper role the government plays in shaping our economy, do we have to reshape our Dreams?" Geithner offered reassurance saying “I think the American Dream is still about freedom and opportunity”. He went on to talk about one of the reasons America had been such a productive country in the past. He continued, citing how much ahead of other countries we were in establishing universal education and many other things that made us strong. The Secretary boasted that we were the envy of the world at one time, “That central vision is still going to be our future”. There were, of course, those questions that we've been hearing in televised round-table debates since the collapse of the financial market last Fall. Geithner fielded the questions with composure and confidence. Another concerned citizen asked: "You let GM fail, but City Bank was too big to fail? Why?": Geithner explained pension funds had already declined 30% by the time Citibank showed exposure, and also reiterated that the government failed to act soon enough. The Treasury Secretary emphasized that the American people played a role by taking on too much debt, and living beyond their means for too long. He went on to say that “you can not solve a crisis by teaching people a lesson”.

Geithner very aptly pointed out that we should be all more committed to never letting this happen again, adding “Never again commit to tax cuts without having a way to paying for them”. He went on to say we should never again finance two wars without a way to pay for them and expand health care without the money to pay for it. In response to the question asked by co-host Steve Liesman, “How much pressure are you under to dial back, and get out of the private sector?” The Secretary adamantly exclaimed “no one is going to be more eager than I am”. Judging by his tone, he meant it. Geithner explained that the TARP program was designed to be used no longer than necessary, adding that there are dangers to withdrawing too soon. He continued saying other country’s have made this mistake in the past, which could reignite the recession and cause even more damage. The Treasury Secretary seemed to believe that the measures that were taken are working. He talked about the recent indications of traction and growth, citing that they already have $88 billion coming back into the treasury from TARP. While predicting that unemployment will stay “unacceptably high?". In closing, Geithner said that after two years, we now have an economy that is starting to grow, but we are just at the beginning. He warned that it is going to take a while to fix this. Back Home

K. Reilly
Cohn-Reilly Report
____________________
WSJ: 9/18/09,“Bankers Face Sweeping Curbs on Pay”
http://www.cnbc.com/id/32372470

Unemployment, Recession & Recovery

Charlie makes some good points about the false use of indicators to determine where the economy is heading. It does seem to be heading in the right direction, but we are far from being able to announce a “complete” recovery. The housing market is still showing declines in building permits and housing starts, while sales are up slightly from last quarter. This is nothing to get excited about, as it could merely be the result of bargain hunters taking advantage of the opportunity to buy in the depressed market. Housing foreclosures have not tapered as much as paused for the next round. According to the Bureau of Labor Statistics, unemployment for the African-American and Hispanic population is estimated to be a staggering 5 times the national rate. As my colleague states, we are not out of the woods, not by a long shot. Those same indicators failed to provide the experts ample warning of the emergence of a vast recession. Last year the market analysts and experts seemed to all be caught off guard. Having said that, it remains a mystery as to why analysts are rushing to judgment about the country’s economic recovery. Particularly since they are well aware of the skewed nature of the various indicators used to make such a determination.

-K. Reilly