Nokia Corporation (NYSE: NOK) shares rose over eight percent today after the company announced spectacular earnings that beat Wall Street estimates. The mobile device maker reported fourth quarter revenues of 15.7 billion Euros versus a consensus of 14.9 billion on sales of 133.5 million mobile devices, up 27% year-over-year and 20% from last quarter. The company also said that it expects a normal seasonal decline in the first quarter, but plans to maintain market share and expand over the next year.

Many investors were shocked by these strong earnings following the poor results posted yesterday by Motorola, Inc. (NYSE: MOT). Nokia showed the opposite story with excellent growth driven by market share gains in Latin America, Europe and Asia Pacific. The company’s mobile phone margins were also at an all-time high at a time when many believe Motorola may cut their prices in order to compete. Earnings estimates for Nokia are expected to be lifted by 5 to 10 percent following this news.

This news is devastating to Motorola shareholders hit with poor earnings just days ago. It is now clear that Motorola’s decline was not the result of an industry slowdown but rather of another decline in market share that could hurt the company. More, the planned price-cutting measures would clearly hurt Motorola more than Nokia given the latter’s strong and improving margins on its mobile phones. Motorola also faces an uphill battle in foreign markets that it has relied on in the past to drive growth.

Nokia does have a little to worry about, however, with the threat of price-cutting. The cellular industry has relied solely on added features, more minutes and other benefits to attract customers rather than pure price-cutting. If Motorola decides that it is the only hope to recover, Nokia and other may have to follow suit. This could spark a price war that could kill margins and hurt all companies involved. Alternatively, if Nokia decides to stay out, they could lose substantial market share.

In the end, this is great news for Nokia and bad news for Motorola. It will be interesting to see how this story plays out over the next few months, but Motorola will need a substantial number of changes in order to turn themselves around in the face of such strong competition.

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Nokia Corporation (NOK)
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Goldman Sachs (NYSE: GS) released an interesting research note on various bond insurers that have seen a spectacular run-up over the last few days. Bond insurance companies make money by providing lenders with insurance that borrowers will make timely payments in exchange for a fee from the borrower. Unfortunately, this great wave of defaults has cost these insurers billions as they are forced to pay out more claims at higher amounts. Recently, some of these companies have come out saying that Wall Street has blown their problems out of proportion. So, how much are they really worth?

Goldman Sachs valued the three largest bond insurance companies under three scenarios. The first scenario (“Run-Off”) is a situation where the insurers won’t raise enough capital to satisfy ratings agencies and may struggle to write new business. The second scenario (“Ongoing Concern”) assumes a capital raise in line with losses with no added book value and a derivative mark-down. And the third scenario (“Bailout”) is a best-case scenario where the firms are bailed out with capital injections sufficient to operate in their current condition.

So, where do these companies stand?

• Ambac Financial (NYSE: ABK)
  • Run-Off: $15
  • Ongoing Concern: $10
  • Bailout: $35
• MBIA Inc. (NYSE: MBI)
  • Run-Off: $6
  • Ongoing Concern: $14
  • Bailout: $48
• Security Capital Assurance (NYSE: SCA)
  • Run-Off: $0
  • Ongoing Concern: $1.50
  • Bailout: $13

Currently, it looks like ABK is trading at Run-Off valuation; MBI is trading at Ongoing Concern valuation; and, SCA is trading at Ongoing Concern valuation. Are these accurate numbers? What are the odds of these companies receiving a bailout? Well, the numbers are somewhat subjective, but a bailout should not be thrown out of the cards – just look at Countrywide. In the end, these companies still face substantial problems, it’s simply a matter of the methods they are able to use to get out of them that determine their valuation!

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Banking stocks have been beaten down to their lowest levels in years thanks to the combination of mortgage and credit problems. It seems like the write-downs on these losses continue to increase every quarter by billions of dollars, which has many would-be investors sitting on the sidelines until the picture gets a little clearer. However, a zealous Federal Reserve issuing emergency rate cuts and a 12% rally on Wall Street has many investors ready to buy now!

The Federal Reserve’s actions are often seen as a precursor to banking stock turnarounds. In the past, an aggressive Federal Reserve, such as the one we are seeing today, that dramatically steepens the yield curve by cutting rates. Unfortunately, we have seen aggressive rate cuts but the yield curve this time is inverted and only moderately steepening – much different than in the past. It appears that banks’ benefit from lower rates is a bit too modest to offset the massive credit problems we’re seeing today.

The real driver behind the growth in the banking sector today is the borrower. Consumer credit is extremely weak these days as they relied on housing prices to increase in order to pay off their debts with longer term debts from other sources – a dangerous cycle. Meanwhile, there is some risk that CRE and corporate borrowers may also soon face problems in the event of an economic slowdown. Many believe that the latter is not yet priced in to the market.

So, who was the big buyer if things still aren’t any better? Well, there is some speculation that hedge funds took the opportunity to close out some of their short positions. There appeared to be a correlation between the top performers and most heavily shorted stocks, although there were some long-term buyers who didn’t want to miss a bottom that likely got in towards the end of the rally. Unfortunately, the bottom is not likely here quite yet as mortgage defaults promise to continue amid a much weaker consumer.

Banking stocks may be cheap now, but prudent investors may want to hold off buying them until they can see the situation with some clarity. However, one of the best banking plays for those looking to take on some risk may be Bank of America (NYSE: BAC) as they have relatively little subprime exposure and recently acquired Countrywide Financial at bargain-basement prices!

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