Nike Disappoints, Buy Foot Locker Instead?

Nike (NKE) ran past earnings forecasts, but that wasn’t enough for fickle investors, who have sold down the sportswear stocks shares today.

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Shares of Nike have dropped 1.2% to $77.33 today at 3:19 p.m., even as Under Armour (UA) has risen 1.3% to $87.16 and Skechers U.S.A. (SKX) has gained 1.9% to $33.06. Even Lululemon Athletica (LULU), which has dropped 16% in December, has ticked up today–it’s gained 0.1% to $58.83.

Marketwatch has the details on Nike’s earnings:

Nike's fiscal second-quarter profit rose to $537 million, or 59 cents a share, from $384 million, or 42 cents, a year earlier, when discontinued operations hurt results by 15 cents a share. Sales in the quarter ended Nov. 30 rose to $6.43 billion from $5.96 billion.

Analysts, on average, were looking for profit of 58 cents a share on sales of $6.44 billion, according to FactSet…

Nike's North American sales rose 9%, missing estimates of analysts many of whom were expecting a gain of at least 10%. Western Europe sales rose 15% while China turned positive with a gain of 5% excluding currency translations.

Canaccord Genuity’s Camilo Lyon and Patrick O’Brien fear the worst is ahead:

In our opinion, this was a fine quarter with no surprises; however, as we expected expenses are accelerating resulting in guidance that implies a meaningful reduction to Q3 and Q4 estimates. Also, gross margin headwinds are mounting as the favorability from raw materials has turned and supply chain disruptions in Mexico will persist for two Q's. Given NKE's premium 25x multiple, we prefer to play its strength through its retail partners ([Foot Locker (FL) and Finish Line (FINL)]).

Susquehanna Financial Group’s Christopher Svezia also recommends investors buy Foot Locker instead of Nike. He writes:

Nike shares trade at 14.8x FY15 EV/EBITDA (SIG), a +46% premium to its five-year average. As expected, current expectations are leaving little room for error. That said, we believe Nike’s momentum bodes well for FL. Nike represents ~65% of FL's sales and is weighted by basketball. In addition, futures strength in North America and Western Europe (Germany, in particular), point to continued momentum in these regions. Recall that Germany represents FL's largest country since the RSG acquisition. At 5.8x NFY EV/ EBITDA, FL shares continue to look relatively attractive complemented by a +2% dividend yield and ~$4.40 a share in net cash.

Shares of Foot Locker have gained 3.2% to $40.95 today, while the Finish Line, which beat earnings estimates today, has risen 7% to $27.97.

Analysis: Stop freaking out over $13B JPMorgan …

The size of the reported $13 billion settlement between the Justice Department and JPMorgan Chase commands awe and attention. It's also garnering a lot of criticism.

The New York Post portrays it as a kind of bank robbery. The Wall Street Journal describes it as the government "confiscating" half of JPMorgan's annual earnings to "appease . . . left-wing populist allies" of the Obama administration.

We still do not know all the details of the tentative settlement or the evidence the government has against the bank. But the initial outburst of horror at the $13 billion figure is very likely unwarranted and appears to be based on a fundamental misunderstanding of how damages should be assessed in cases of financial wrongdoing.

In the first place, any view about the unprecedented size of the fines needs to be balanced by the unprecedented size of JPMorgan.

The bank now has $2.4 trillion in assets. This means there are more opportunities for legal liabilities to arise and a need for larger fines to punish wrong-doing. A fine of a few million dollars — even several hundred million dollars — barely merits a footnote in a JPMorgan earnings report.

REALTY CHECK: How JPMorgan deal could curtail credit

VIDEO: Breaking down JPMorgan's settlement

CARNEY AND COX: NetNet's news roundup

In thinking about the size of the potential JPMorgan settlement, it's helpful to begin with the very basics.

Fines levied by the government should aim to deter undesirable behavior without over-deterring beneficial behavior. We want to avoid outright fraud and negligence without making it impossible for banks to offer mortgage securities to investors.

Many people worry that very large settlements could permanently disrupt the mortgage market.

Extreme fines could make playing the role of issuer just too risky for banks. Or, alternatively, the cost of investigating mortgage quality and compliance with representations and warranties required by investors (and, after th! e fact, by regulators) may simply be more than the market can bear.

But this is only one side of equation.

On the other side, there are the potential investors who need to know that banks are properly incentivized to live up to the promises they make when issuing mortgage-backed securities. That there is no room for "efficient fraud" or "efficient negligence" whereby the bank makes more by fraudulent or negligent issuance than loses through fines years later.

Large fines should convince investors that the market in mortgage-backed securities is safe enough to re-enter.

In other words, if we focus on the demand side, strict enforcement of promised credit standards in mortgage-backed securities could lead to looser credit and more mortgage finance availability. Investors will know that the system can be trusted.

Ideally, the fines for the negligence claims would be high enough to incentivize future issuers to properly investigate the underlying mortgages but not so high as to make issuance prohibitive because of possible legal liabilities. Which is to say, we'd want the fines to exceed to cost of undertaking an investigation into the loans multiplied by the odds of getting away with not investigating—and we'd want that number not to be so high that they make issuance completely uneconomical.

We do not, however, live in the ideal world. In the real world, there may be no actual middle ground on which regulators, investors and issuers can meet.

Fines large enough to convince investors that issuers will be well-behaved may be too large for issuers to bear. There may not be a market for the securitization of any but the safest mortgages.

That would mean that we either have to accept that the market for riskier-mortgages will be tighter for the foreseeable future or allow for continued subsidization of this market through government guarantees.

Instead, however, everyone seems to want to pretend that we live in the ideal world where mortgages are safe, ch! eap and r! eadily available so long as everyone follows the rules.

But assuming that the admittedly shocking size of the JPMorgan settlement is a sign that regulators are over-reaching is a mistake. In a world of multi-trillion dollar banks taking in scores of billions in revenue, effective deterrence comes with a high price tag.

Follow Carner on Twitter: @Carney

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The Latest Perspectives on Photo Collecting

With the arrival of phone cameras and social media sites, it seems everyone is a photographer nowadays. Investors who enjoy photography and want to add a new hard asset to their portfolios, however, might want to consider purchasing historic, collectible photos or contemporary photos taken with stand-alone cameras.

Like other fine art markets, it’s misleading to speak of a single photography market, because there are multiple sub-markets.

Denise Bethel, head of the photographs department at Sotheby’s in New York, notes that classic photos—the equivalents of blue-chip stocks—are a major category. Several of these photos, often dating from the early 20thCentury, each have sold for over $1 million at auction.

There’s also a thriving market in contemporary photography, says Bethel, and the top photos in that category can command seven figures.

The variety of categories gives collectors considerable range of choice.

“We do have collectors who collect across the board,” says Bethel. “So, for instance, collectors who start with Daguerreotypes and go all the way to contemporary photography.

“And, we also have collectors who specialize so there are collectors who only collect, let’s say, American modernist photography from the first half of the 20thCentury or European 19th-Century photography or contemporary photography,” she explains. “So, we’ve got people who collect every decade of photography and then we have people who are more specialized.”

In addition to numerous periods and types, photo prices cover the spectrum. Consider Sotheby’s early October auction in New York. Sales totaled over $5 million, but a large number of the lots sold for less than $10,000.

Apart from the auction houses, online galleries such as PurePhoto.com also offer collectible photos at a wide range of prices.

Careful Consideration

There’s a standard piece of advice given to collectors of fine paintings and other expensive collectibles: Unless they have very deep pockets, they can either buy art that they love and not worry about building a collection or they can focus on building a collection that will have more appeal to potential buyers.

Photo collectors can accomplish both goals, says Bethel. “You can certainly craft a very good collection by buying what you like,” she says. “You can do both simultaneously. I don’t think you have to do one or the other. I’d recommend that you do both simultaneously.”

As with any collectible, buyers need to know their market or be able to hire experts with that knowledge. Fortunately, there are ample educational resources available, including websites, books, auction catalogs, and museum and gallery displays, for example.

Bethel advises prospective collectors to spend at least a year looking before purchasing anything. The learning process can include going to museum exhibitions, photography galleries and fine art galleries that sell photography and previewing multiple auctions.

There’s also a vast wealth of photography books available today, she says. “I know that when I started back in 1980, you could buy the essential photography books you needed by buying 10 or 20 books,” she says. “Now, walk into any bookstore and the photography section is huge.”

The expert also suggests that potential buyer get on the mailing lists for catalogues put out by the different auction houses.

“Look and learn before making that first purchase. And, then, once you do start to purchase things, I recommend keeping up, keeping up with the auction market, keeping up with what’s going on in museums, keeping up with the gallery scene,” Bethel explains. “And, of course, there’s always the option of hiring an art advisor who knows the territory to help you.”