STT opened this morning at $40.88. So far today the stock has hit a low of $40.63 and a high of $44.93. As of 12:20, STT is trading at $41.61, up 0.38 (0.9%). The chart for STT looks neutral and S&P gives STT a 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $25 range.
If you break the cycle of short-and-no-cover, you can win.
I know that wasn't the purpose of the Anglo-French plan that we were dragged into, but it will be the effect, and the effect will be electric.
Let's just take an obvious example: State Street (NYSE:STT). This is a longtime conservative trust bank that is an important custodian for life savings and for mutual funds. For a year now it has been under assault as an institution that has too much leverage in hard-to-value asset-backed instruments. The idea that a custodian could fall apart is something that shakes every money manager to his core and causes him to take his money out of cash and put it in T-bills. That's been going on for ages now, and I know money managers who are scared to death to keep their money "in the system," which is State Street, something that instills panic across the board.
When you hear that and you are a short-seller you know what to do: You plunk down $25 million to buy credit default swaps to wager against the firm's debt, then you buy position limit puts and then you short the stock along with all of the other like-minded souls you talk to every day. You get the stock rolling downhill, then you buy a second set of swaps, paying double the price -- doesn't matter what the vig is when you know you are going to win -- and then you call the media and you tell them that everyone's pulling their money out of State Street and the credit default swaps are spiking huge and then the media goes out and reports on it. The company is helpless to refute it as the problem is being caused by the sellers because it is pretty much business as usual in a very tough time, and the stock gets hit again. Other hedge funds get wind, they short it down further, longs panic and then the credit agencies put the company on notice because where there is smoke there must be fire. Then the clients pull as much money out as possible and voila, the end of State Street.
We have seen this run several times. Frankly, I don't know how State Street stayed in business.
Until this morning, the only policy that had been put in place to stop this destruction of capital by the shorts -- and I fully concede that State Street may have made mistakes, but I will not concede that those mistakes should have made it be wiped out -- was an out-and-out short-selling ban. That was ludicrous, but what do you expect from this SEC that eliminated the uptick rule right in the teeth of the greatest bull market and allowed naked shorting to go on illegally?
The markets could have changed their name to 'Yo-Yo' today rather than 'Skydiver.' It wasn't the VIX reaching multi-year highs of 40 that ran us up. It wasn't last night's intervention. It was the first overseas curbing of short selling financial stocks in the U.K. and then the word that the government was preparing a new version of the Resolution Trust Corporation.
Washington Mutual Inc. (NYSE: WM) was a huge winner today. Shares were up over 50% at $3.17 right before the close after it has formally put itself up for sale. The rest of the rally came from government hopes of a new RTC.
American International Group (NYSE: AIG) also saw a monster run. Shares rose 20% to $2.45 on more than 200 million shares. Tie that one to a possible RTC as well.
After the implosion of IndyMac Bancorp (NYSE: IMB) and news of the deterioration of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) last week, there's bound to be a certain level of trepidation as the earnings crunch begins this coming week and many big financial companies report. Here's a look at what Wall Street was expecting (see The week in preview: Expectations as the earnings crunch begins for expectations of other reporting companies.)
Analysts surveyed by Thomson Financial are expecting the following of companies to report lower earnings when compared to the same period of the previous year.
MOST NOTEWORTHY: PetSmart, Banco de Chile and Xerium Technologies were today's noteworthy upgrades:
JP Morgan upgraded PetSmart (NASDAQ: PETM) to Overweight from Neutral citing the company's position in a relatively strong category, benefits from food inflation, and margin improvements.
Deutsche Bank upgraded shares of Banco de Chile (NYSE: BCH) to Buy from Hold as they expect greater earnings power following the acquisition of Citibank Chile.
Citigroup upgraded Xerium Tech (NYSE: XRM) to Buy from Hold on the success of the company's debt renegotiation. The firm also raised the company's target to $7 from $2.
U.S. stock futures were down slightly this morning, reflecting nervousness about economic data and earnings reports due out today.
Stocks fell Tuesday for the second session in a row after disappointing earnings from Wachovia surprised the market. The Dow industrials ended the day down 23 points, the S&P 500 lost 5 points, and the Nasdaq Composite fell by 14 points.
In the news, Delta Air Lines (NYSE: DAL) and Northwest Airlines (NYSE: NWA) announced yesterday that they will combine to form the world's largest airline, with a market value of $17.7 billion. The new airline will be called Delta. United and Continental may be next in line to tie the knot.
In another blow to the ailing airline sector, oil prices rose to an intraday record of more than $112 a barrel Tuesday as the U.S. dollar continued to weaken against other major currencies.
There was evidence of continuing deterioration in the housing market -- according to a report by RealtyTrac for March, U.S. foreclosure filings rose 57% and bank repossessions more than doubled from last year. However, there was some good news from Detroit as Ford announces plans to step up production of the compact Focus by 30% to meet strong demand.
Economic data due out today includes the Producer Price Index, a measure of wholesale inflation, at 8:30 a.m. EST, the Empire State Manufacturing Survey at 8:30 a.m. EST, and the Housing Market Index at 1:00 p.m. EST.
MTB), State Street (NYSE: STT) all reporting before the open. After the close, all eyes will be on Intel and Washington Mutual, as they report earnings.
Analysts surveyed by Thomson Financial expect Northern Trust Corp. (NASDAQ: NTRS) and State Street Corp. (NYSE: STT) to report profit gains in the first quarter. Both companies are scheduled to post results on Tuesday.
Northern Trust is expected to earn 95 cents per share, which is up 13% from the same period in 2007 when it earned 84 cents. The company has tended to beat quarterly estimates recently. In the third quarter of 2007, it beat the consensus estimate by 6.7%, and in the fourth quarter it beat it by 4.8%.
Chicago-based Northern Trust provides banking and trust services to the affluent and to financial institutions and corporations. In the past year, its revenues were $5.4 billion and its net income totaled $726 million. Its EPS growth forecast for the year is 9.6%, which is better than the banking industry average and the S&P 500. But the consensus recommendation of analysts is still to hold Northern Trust.
The stock has gained 11.2% in the past year and trades at a P/E of 18.37. Shares closed Friday at $67.22.
The quarter has hardly begun and, with analysts and investors watching nervously, the earnings crunch is about to begin anew. The following 11 big banks are among companies reporting results the week of April 14 to April 18.
These three are expected by analysts surveyed by Thomson Financial to be the the top performers in the first quarter, based on earnings growth from the same period of last year:
MOST NOTEWORTHY: RAM Holdings, State Street and Ericsson were today's noteworthy downgrades:
Banc of America downgraded shares of RAM Holdings (NASDAQ: RAMR) to Neutral from Buy as they believe the company could have increasing loss provisions related to RMBS and CDO exposure over the next several quarters.
State Street (NYSE: STT) was cut to Market Perform from Outperform at Keefe Bruyette on valuation and difficult comparisons in the second half of 2008.
HSBC downgraded Ericsson (NASDAQ: ERIC) to Neutral from Overweight and prefers Nokia (NYSE: NOK) at current levels.
US Bancorp reported that fourth-quarter profit fell 21%, partly due to one-time charges. The company had warned about the effects of the real estate slowdown, but it appeared to sidestep the worst of the problems plaguing other lenders. The company's CEO made it a point to explain that the nation's seventh-largest bank is "well capitalized." U.S. Bancorp's net income fell to $942 million, or 53 cents per share, from $1.19 billion, or 66 cents per share, year over year. Analysts surveyed by Thomson Financial had expected profit of 59 cents per share.
State Street reported Tuesday that fourth-quarter earnings fell 28% after the company took a charge to cover fallout from its subprime investments. Excluding the charge, earnings rose to $540 million, or $1.38 per share, from 86 cents per share last year. Analysts polled by Thomson Financial, whose estimates excluded one-time items, had expected earnings of $1.35 per share. Revenue rose 53% to $2.48 billion from $1.62 billion in the same period last year. Analysts had expected revenue of $2.39 billion.
Genentech (NYSE: DNA) shares are down 1% in premarket trading after the company reported results that beat estimates late Monday. While fourth-quarter profit rose 6%, there were concerns over sales growth.
Nokia Corp. (NYSE: NOK) is continuing its upward move this morning with the stock indicating 1.4% higher in premarket trading. MarketWatch reports that the company "Tuesday said it may slash as many as 2,300 manufacturing jobs in Germany as it moves production to lower-cost European countries such as Romania."
Macworld is to begin today. Apple Inc.'s (NASDQ: AAPL) CEO Steve Jobs will deliver his keynote address at noon. While no one is expecting news such as the iPhone this time, some new products are nonetheless expected. One such new product is the highly anticipated ultraportable MacBook Air. The blogosphere has been buzzing with what is claimed to be mockups of the laptop based on leaked information.
Thomson Financial expects State Street Corp. (NYSE: STT) to earn $1.31 when it announces its fourth-quarter earnings on January 15th. That's 56% above the same period in 2006, when it earned $0.84.
State Street is a Boston-based bank operating in two lines of business: investment servicing and investment management. In the last year, its revenues were $5 billion and its net income totaled $1.3 billion. Its stock has gained 20% of its value in the last year, and it trades at a P/E of 21.8.
It has a strong track record of exceeding expected earnings. In the second quarter of 2007, it beat by 5.9% and in the third quarter it beat by 22.3%. My hunch is that it will beat again.
Update. I was way off on State Street. It reported a 28% decline in EPS to $0.57. The problem was legal costs for subprime mortgages of $618 million. State Street said 2008 growth will be at the lower end of its target ranges, sending the shares down as much as 8%. On the plus side, State Street beat the $1.35 average EPS estimate -- excluding one-time charges -- of 15 analysts surveyed by Bloomberg by three cents a share. But the lower guidance is killing the stock.
The head of State Street's (NYSE: STT) investment unit has resigned, the company announced Thursday. It also said that it will set aside $618 million, including $279 million, or 71 cents per share, to establish a fund to cover legal and related costs due to losses in its fixed-income strategies.
State Street said William Hunt, CEO of State Street Global Advisors (SSgA), was replaced by James Phalen on an interim basis. Phalen will report directly to State Street's CEO, Ronald Logue.
"We have reviewed the actively managed fixed-income strategies at SSgA that contained investments backed by sub-prime mortgages. Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies," Logue said in a statement.
Including the aforementioned earnings charge, 2007 earnings per share are expected to be $3.42-$3.45. Excluding the charge, 2007 earnings per share are expected to be $4.54-$4.57. The Reuters 2007 EPS consensus estimate for STT is $4.20, excluding charges.
Relief rally?
Wall Street's reaction to State Street's announcement was decidedly not negative, as State Streets' shares gained more than 5% or $4.72 to $83.61 in Thursday morning trading.
State Street Corp. (NYSE: STT) has set aside $618 million to cover the legal costs of its bad subprime mortgage bets. It's already taken a $279 million charge to cover those legal costs.
This is a unique twist to the damage caused by the subprime mortgage meltdown. Rather than taking a charge to write-down the value of securities backed by subprime mortgages, as many banks have done, State Street is facing massive lawsuits charging that the money manager's subprime investment bets were at odds with the intent of its customers -- fixed income investors.
State Street was competing for assets by trying to increase the yield on its bond funds. To do that, it bought subprime mortgage-backed securities that promised higher yields at low risk. But it turned out that the higher yields came with higher risk. This higher risk is not what State Street's clients thought they were buying.
State Street (NYSE: STT - option chain) shares are moving higher today despite the markets being in the toilet again. This could be because STT is one of the companies that are getting cash from the government. STT will receive a $2 billion cash injection from the federal government in return for non-voting senior preferred stock. 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 STT.
The markets could have changed their name to 'Yo-Yo' today rather than 'Skydiver.' It wasn't the VIX reaching multi-year highs of 40 that ran us up. It wasn't last night's intervention. It was the first overseas curbing of short selling financial stocks in the U.K. and then the word that the government was preparing a new version of the Resolution Trust Corporation. 
After the implosion of 
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U.S. stock futures were down slightly this morning, reflecting nervousness about economic data and earnings reports due out today.
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