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When bad results boost stocks

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.

Continue reading When bad results boost stocks

Newspaper wrap-up: Citigroup closing in on deal to sell $12B of its leveraged loans

MAJOR PAPERS:
  • In an effort to increase sales in the Middle East, the Wall Street Journal reported that Dell Inc (NASDAQ: DELL) is in talks with a government-owned vehicle in Dubai called Tecom about establishing a joint venture.
  • The Wall Street Journal also reported that Washington Mutual Incorporated (NYSE: WM), which obtained a $7B capital infusion from TPG and other investors, had reportedly been working on the TPG deal while negotiating with JP Morgan Chase & Co (NYSE: JPM), which made a preliminary takeover bid of about $7B, people familiar with the deal said.
  • Citigroup Incorporated (NYSE: C) is close to reaching a deal to sell $12B in leveraged loans at a discount to a group of leading private equity firms, the Financial Times reported. Although details of the deal were still being worked out, inside sources said Apollo Management, The Blackstone Group LP (NYSE: BX) and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.
OTHER PAPERS:
  • The UK Times reported that The Boeing Company (NYSE: BA) is today expected to announce that its 787 Dreamliner has been delayed by 18 months, a setback which will affect all airlines that have ordered the 787, including British Airways Plc (OTC: BAIRY) and Virgin Atlantic.

Newspaper wrap-up: TPG, others, to invest $5B Washington Mutual

MAJOR PAPERS:
OTHER PAPERS:
  • Evergreen Solar Inc (NASDAQ: ESLR) is expected to announce today that it will double the size of its manufacturing facility in Massachusetts and add about 350 new jobs as part of its ongoing expansion, according to the Boston Globe.
WEB SITES:
  • Bloomberg reported that The Goldman Sachs Group Inc (NYSE: GS) has been the only major investment bank that has refused to reduce its leverage. In fact, Goldman's adjusted leverage ratio of assets rose to 18.6 at the end of February, from 17.5 at the end of November.

Symbol Lookup
IndexesChangePrice
DJIA-89.2312,801.23
NASDAQ-23.352,903.88
S&P 500-9.311,342.64

Last updated: February 12, 2012: 09:41 AM

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