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.
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.
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.
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.
I know it doesn't matter at all. Right now we are so stuck on the banking problems and on the companies bleeding from higher energy prices that nobody cares about all of this cash, which will be used to shrink equity. They won't care because the banks, brokers and homebuilders, and the hobbled companies that use oil, have to issue so much equity that you can't see the effect of the equity shrinkage. But it will eventually matter. It has to matter that Deere has taken out 10% of its stock in the last four years. It does matter that Black & Decker (NYSE: BDK) (Cramer's Take) has eliminated almost 20% of its equity. Emerson's taken out 5%, same with Boeing (NYSE: BA) (Cramer's Take). There's just a huge amount of equity being shrunk.
MOST NOTEWORTHY: Wachovia, American International Group and BT Group were today's noteworthy downgrades:
Oppenheimer downgraded shares of Wachovia (NYSE: WB) to Underperform from Perform as they believe the outlook is "bleak" for equity shareholders. The firm thinks Wachovia's expenses can't come down fast enough too offset earnings erosion.
Wachovia downgraded shares of American International Group (NYSE: AIG) to Market Perform from Outperform as they believe AIG's CDO valuations worsened in Q2, which could result in a $2B-$7B after tax "valuation adjustment." Wachovia expects the value of AIG's core insurance franchise to be obscured by its credit exposure.
Collins Stewart cut BT Group (NYSE: BT) to Hold from Buy on concerns surrounding the company's fiber network expansion.
OTHER DOWNGRADES:
Nokia (NYSE: NOK) was downgraded to Add from Buy at WestLB; the firm also lowered Ericsson (NASDAQ: ERIC) to Hold from Buy and Alcatel-Lucent (NYSE: ALU) to Sell from Hold.
Third Wave (NASDAQ: TWTI) was cut to Hold from Buy at Deutsche Bank.
AT&T (NYSE: T) was removed from Goldman's Conviction Buy List.
TheStreet.com's Jim Cramer says our problems are so widespread, he sees lots more IndyMacs before we're out.
You don't need me to tell you it's awful out there. You don't need me to tell you that there's no quick fix for any of these things. But what might help you understand why it feels so bad this time is that I have never, in my career, seen so many companies go off track at the same time. This is one unbelievable moment, and it is made more horrible by the day as companies' stocks just get pummeled, causing people to then question the very viability of the companies involved.
First, obviously, are Fannie Mae (NYSE: FNM) (Cramer's Take) and Freddie Mac (NYSE: FRE) (Cramer's Take). We don't know what will happen, but we do know that their futures are much darker than their pasts. Their best hope: a Democrat becomes president and shows the usual love to both. But as investments, they are pretty much perma-losers going forward. The losses are that heavy. Yes, it is true that two years from now they will be better, but will the government let them limp through to that? View them as calls on a Democratic win.
We all know that Citigroup (NYSE: C) (Cramer's Take), Wachovia (NYSE: WB) (Cramer's Take), Washington Mutual (NYSE: WM) (Cramer's Take) and National City (NYSE: NCC) (Cramer's Take) are in trouble. Bank of America (NYSE: BAC) (Cramer's Take) says it isn't in trouble, but obviously the market doesn't believe management because the stock failed to rally when it said its dividend was safe. Any short-selling hedge fund could hire 30 actors and have them line up at a Washington Mutual or two and get a bank run going. Then we would have to hear about a "hasty" Treasury department plan to bail out WM. Hasty? How can these guys not see it coming?
With shares in Lehman Brothers (NYSE: LEH) losing another 14% of their value Monday, and the stock trading under $13, rumors are swirling as to what the bank is planning to do. While there has been speculation that the bank may be taken private, an option that I think is very interesting, others have said that another bank is going to swoop in and take over the company. At the discount levels the stock is trading, that may make sense. The only problem is who the buyer will be.
MarketWatch has an interesting article about this issue and the claim is that there really is no one out there to make a bid for the struggling investment bank. The article quotes Jeff Harte, a securities industry analyst at Sandler O'Neill & Partners, " I'm hard pressed to give you many viable buyers of Lehman. Most large banks are focused on their own capital issues. Even if a bidder did come forward, it would have to win over a lot of Lehman employees -- who control around 30% of the stock -- or risk losing them once the deal was complete."
The most obvious suitor would be JPMorgan (NYSE: JPM), but it has its hands full with Bear Stearns. Other banks like Citigroup (NYSE: C) or Wachovia (NYSE: WB) are fighting for survival. That leaves us with European banks, many of whom are also trying to stay afloat. One bank that has the money needed to finance a deal could be Deutsche Bank (NYSE: DB). It could be interested in a deal as it would gain a foothold into the fixed-income desk at Lehman. The only problem is that the bank is focused on growing its retail banking franchise, not investment banking.
Which leaves us with the first option as the best one. Go private. Clean up the balance sheet, get profitable, wait a few years for the financial storm to pass, and go public once again.
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 7/15/08.
Who is next to fail/fall? That seems to be the only question on investors' minds these days, and this morning is not different as concern about the health of the financial sector grows. With global markets plunging overnight, the dollar falling to yet another record low against the euro and ahead of a day full of economic data releases and earnings, as well as a testimony from Fed chairman Bernanke, U.S. stock futures dropped this morning, indicating the market is poised for a lower open.
On Monday, what seemed like might be a promising day with the government plan to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and several large deals including the mega beer deal between Anheuser-Busch (NYSE: BUD) and InBev. But once again financials took front stage and after IndyMac was seized by federal regulators over the weekend Wall Street tumbled. The Dow industrials fell 45 points, or 0.41%, the S&P 500 dropped 11 points, or 0.9%, and the Nasdaq Composite lost 26 points, or 1.17%.
As the day go on, investors will have more to chew on though as several economic reports are due out today. June Producer Price Index, a measure of inflation at the wholesale level, is due before the market open, at 8:30 a.m. EDT. While economists expect a smaller increase in prices in June, an increase is expected for both PPI and core-PPI, which excludes food and energy prices. At the same time, June retail sales will be released, and may show a nice increase due to the government checks. July NY Empire State Index will also be released at that time and it's likely we'll see it decline further. Then, 10:00 a.m., a reading on business inventories for May is due.
Wachovia downgraded AIG (NYSE:AIG) to "market perform" from "outperform", according toBriefing.com. The news service also reports that Oppenheiner downgraded Wachovia (NYSE:WB) to "under-perform" from "market perform".
AT&T (NYSE:T) maintained Buy but Removed from Conviction Buy List at Goldman Sachs according to247wallst.com. The financial website also reports that Motorola (NYSE:MOT) Started as Sell at Societe Generale
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. 
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.
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