Here's the answer every hedge fund knows: It will not let you raise numbers in the out years.
Right now there is a tremendous struggle going on about near-term and far-term earnings growth and what we can expect to see. Everyone knows when Mosaic and Potash report next week that the numbers will be beaten and the estimates raised.
But so what? If you scrap the ethanol mandate or if people even think that it will be scrapped, you will see grains collapse just as quickly as oil collapsed when we found a level we didn't need it -- remember, we don't "need" ethanol, but it is mandated.
It's officially a trend because it's happened more than three times -- a bad financial report leads to a spike in stock prices. (I posted here and here about this phenomenon with Citigroup (NYSE: C) and Bank of America (NYSE: BAC) respectively). Now, the New York Times reports that five banks lost billions, or saw their profits plunge, but their stock prices rose an average of 12.9% in the wake of those reports.
Why? The conventional wisdom suggests that investors expected them to do much worse and were pleasantly surprised. And this phenomenon is not confined to banks -- this morning, Yahoo (NASDAQ: YHOO), which reported a penny less profit per share than the 10 cents analysts had expected, is up 3% in premarket, reportedly because it did not lower its guidance.
I am not convinced by conventional wisdom about why these stocks are up. My hunch is that there were many traders who sold short the stocks of these companies because they expected them to do worse than they actually did. When reported results beat expectations, investors bought the stocks, perhaps due to bottom fishing. These buyers caused the stocks to rise enough to trigger margin calls for those who were short. The shorts bought to satisfy those margin requirements, causing a buying panic. I wish I had data to test this hypothesis.
Hank Paulson led the charge this morning talking about the need and credibility of the GSE's. Oil was up for a while but after Tropical Storm Dolly headed further south than the oil and gas infrastructure that locked in heavy oil selling. The major focus continues to be earnings and financial stocks in particular. Below are today's unofficial closing bell levels: DJIA 11601.60 (+134.26) S&P500 1276.80 (+16.80) NASDAQ 2303.96 (+24.43) 10YR T-Note 4.097 (+0.03%) 52-Week Lows Top Analyst Calls
American Express Company (NYSE: AXP) was one of the more poor financial stocks today after the company choked on earnings last night. It is also facing deteriorating business despite it being thought of as the highest quality credit card around. Shares were down 9.2% at $37.13 in today's final minutes.
Some may view the sun as rising while others see it setting. Before you send me your rant that the pain has just begun and I am foolish to believe the recent market upswing is anything but a short term reprieve, let me share a few thoughts.
Today Wachovia Corp (NYSE: WB) reported a loss of $1.30 a share compared to the average analysts' guess of $1.27 a share. WB lost almost $9 billion, is cutting the dividend and will layoff 6,400 employees. All bad news -- and still the the stock and the DJIA are up!
At the same time, oil is trading down about $4 a barrel during the busiest driving time of the year because people are actually conserving gas. The market is working. It should also be noted that after the Bush administration spent over seven and a half years stating various preconditions to establishing relations with Iran, last week they decided to send an envoy and start a dialog. It may be good or bad politics depending on your view -- but it is only good for the stabilization of oil prices.
Wachovia Corp. (NYSE: WB) is recently up $1.33 to $14.45. Wachnovia reported Q2 EPS loss of ($1.27) ex items verses consensus estimates of ($0.78). WB lowered its quarterly dividend to $.05. WB will take a $6.1 billion goodwill charge for Golden West. WB August option implied volatility of 94 is below a level of 141 from July 21 and above its 26-week average of 59 according to Track Data, suggesting larger price movement.
Financial Select Sector SPDR (ETF) (AMEX: XLF) is recently up $.30 to $21.05. XLF August option implied volatility of 50 is above its 26-week average of 37 according to Track Data.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Town Bankruptcy Bad Sign for Other Towns The mortgage crisis, the limping economy and a recent bankruptcy filing by Vallejo - the first municipality to do so since Desert Hot Springs, Calif., in 2001 - have hobbled this town of 120,000. Vallejo's closely watched Chapter 9 bankruptcy filing in federal court in Sacramento may be a warning sign of dangers that could befall other cash-strapped municipalities. Economy hobbles Calif. town - USATODAY.com 10 Funds Suffering the Biggest Exoduses Which mutual funds are seeing the biggest outflows in 2008? They include some very well-known popular funds like Fidelity Low-Priced Stock, American Funds Investment Company of America and the Legg Mason Value funds. The 10 Funds Suffering the Biggest Exoduses
Wachovia (NYSE: WB) is out with numbers that were much worse than the Street had estimated. According to MarketWatch Wachovia "lost $8.86 billion, or $4.20 a share, in the second quarter, compared to a profit of $2.34 billion, or $1.20 a share, a year ago. On an adjusted basis, it lost $1.27 a share; analysts polled by FactSet Research had expected a loss of 71 cents a share."
Yikes. A loss of $8.9 billion -- how is that even possible? The company also slashed its dividend to just 5 cents a share and is closing down its wholesale mortgage operations.
I guess the real question is barring a takeover, how long will it be till the whole bank gets shut down? Just think the loss is equal to a third of its entire market cap.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/22/08.
Stocks futures are lower Tuesday morning, indicating U.S. stock markets will start on a down note following weak outlooks and disappointing financial results from several companies including Apple and American Express. With oil steady and no economic data out today, Wall Street will focus on earnings.
Apple Inc. (NASDAQ: AAPL) reported after the close Monday a record quarter that beat analyst estimates, posting a 31% surge in earnings. Mac and iPod sales satisfied investors, while iPhone sales were somewhat on the lighter side. What concerned investors most was the very weak guidance Apple gave, which was weak even by Apple's standards of lowballing. Other issues included margin squeeze and Jobs health. Apple shares were 10% lower in Frankfurt and premarket trading. American Express (NYSE: AXP), said late Monday its second-quarter results fell 38% due to the weakening economy. The company, which missed projections, caters to the more affluent who have good credit, and yet even this company felt the pains from the slowing economy. AmEx earned 56 cents per share compared to estimates of 83 cents per share. The company's stock tumbled AXP shares are down over 12% in premarket trading.
Also reporting Monday after the close were Merck & Co., Inc. (NYSE: MRK), Texas Instruments (NYSE: TXN) and SanDisk (NASDAQ: SNDK). MRK shares are down over 6.6% in premarket trading as the company said it would stop give guidance of results. TXN shares are also declining over 10.5% in premarket trading after it gave a disappointing forecast. SNDK shares are plunging over 16% in premarket trading after it swung to a Q2 loss, missing analyst estimates.
This morning we'll have another wave of earnings, and already started were DuPont and Wachovia.
For veterans of the finance world, the credit crunch is a mind-numbing conundrum. For example, Treasury Secretary Hank Paulson -- who was a former Goldman Sachs Group, Inc. (NYSE: GS) chief -- sometimes seems befuddled.
So, why not bring on board some other super smart finance folks?
Well, that's what Paulson is doing. In fact, this week he snagged Ken Wilson, who is the vice chairman of investment banking and chairman of financial institutions business at Goldman. Interestingly enough, he's been structuring some of the key banking deals over the past year, such as the financing of National City Corporation (NYSE: NCC) and advisory work for Wachovia Corporation (NYSE: WB).
True, Wilson's stint will be short-term (lasting until January 1st, when George Bush will leave the White House). But, for the US taxpayers, it's a pretty good deal. After all, he is going to forgo any compensation.
Wachovia (NYSE: WB) shares are trading higher with most other banks after rival Bank of America (NYSE: BAC) posted a second-quarter profit that beat analysts' expectations. WB reports earnings tomorrow morning before the open and is pretty much in the same boat as BAC, so this, along with other positive earnings from financial stocks last week could imply that Wachovia will see a good reaction to their release. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WB.
After hitting a one-year high of $53.10 in September, the stock hit a one-year low of $7.80 last week. WB opened this morning at $13.52. So far today the stock has hit a low of $12.98 and a high of $14.66. As of 12:55, WB is trading at $13.61, up 64 cents (4.9%). The chart for WB looks bearish and steady, while S&P gives the stock its lowest 1 STARS (out of 5) strong sell rating.
For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $7.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just four weeks as long as WB is above $7.50 at October expiration. Wachovia would have to fall by more than 44% before we would start to lose money.
WB hasn't been below $7.50 at all in the past year and has shown support just below $10 recently. This trade could be risky if the company's earnings (due out tomorrow morning) disappoint, but even if that happens, this position could be protected by the support the stock might find at its year low at $7.80.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in WB or BAC.
Wachovia (NYSE: WB) is recently up 68 cents to $13.65. WB is scheduled to report Q2 EPS on July 22. WB call option volume of 50,778 contracts compares to put volume of 61,557 contracts. WB August option implied volatility of 141 is above its 26-week average of 58 according to Track Data, suggesting larger price movement.
The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.
That's thanks to a temporary rule it created last Tuesday that blocks the short selling of the stock of 19 big banks and financial institutions unless the short sellers can borrow those shares. (As Barron's [subscription required] points out -- it's interesting that the SEC has announced it is enforcing this so-called naked short rule since the practice is already illegal).
I can only imagine the profit opportunities available to those who had early access to this list of 19 -- which according to my calculations have risen an average of 27.5% since Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- whose CEO made $20 million last year, according to AP -- are the biggest winners -- up 90% and 74.5% respectively since then. Meanwhile, all the other companies that the SEC did not protect are wondering why they were not on the list.
Which States Are Helping Homeowners Battling Foreclosure? Frustrated by the slow pace of federal relief, states around the country are pouring hundreds of millions of dollars into their own programs to stem the rising tide of home foreclosures. See if your state is stepping up to the plate. States battle mortgage foreclosure threat; see chart - USATODAY.com
TheStreet.com's Jim Cramer says the writing's on the wall, so position yourself accordingly. 
It's officially a trend because it's happened more than three times -- a bad financial report leads to a spike in stock prices. (I posted 
Some may view the sun as rising while others see it setting. Before you send me your rant that the pain has just begun and I am foolish to believe the recent market upswing is anything but a short term reprieve, let me share a few thoughts.
Wachovia Corp.
Stocks futures are lower Tuesday morning, indicating U.S. stock markets will start on a down note following weak outlooks and disappointing financial results from several companies including Apple and American Express. With oil steady and no economic data out today, Wall Street will focus on earnings.
For veterans of the finance world, the credit crunch is a mind-numbing conundrum. For example, Treasury Secretary Hank Paulson -- who was a former 
and 
. He also operates 
The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the 
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