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.
After a very eventful first trading day of 2008 that saw oil hit $100 a barrel and stocks plunge, futures are mixed this morning, indicating stocks may yet continue yesterday's decline with a weak open if data comes out unfavorable. Economic data will no doubt attract much attention today as well as investors are concerned more and more about the health of the economy.
On Wednesday, several reports showed the economy is slowing. In addition to the economic data, oil prices reached $100 a barrel for the first time and there was a parade of downgrades from analysts with chips being hit the most. U.S. stocks, which actually started somewhat higher, stumbled. The Dow Jones Industrial Average fell 220 points, or 1.67%, its worst opening-day performance since 1983. The S&P 500 lost 21 points, or 1.44%, and the Nasdaq Composite lost 42 points, or 1.61%.
Several economic indicators are also due for release today:
At 8:15 a.m. EST, the ADP monthly employment report, which many see as a preview to the upcoming government employment report tomorrow.
At 8:30 a.m., the weekly jobless claims report will also be released.
At 10:00 a.m., November factory orders data will be released.
Finally, and with oil hovering near $100 a barrel (above $99.50) probably more significant this week than others, is the crude inventory release due out at 10:30 a.m. EST.
If you own a bank stock, you know how brutal the stock market can be. Many are down more than 50% as the subprime mortgage mess continues to shock all investors. But some banks are being punished for being a bank, not for mortgages they don't even own.
Not all banks are the same. Most banks make mortgage loans to several different kinds of buyers for different types of properties: existing homes, new construction, and/or commercial buildings. Or they only make loans to well-qualified buyers, ones with good income and high FICO scores (your credit score). Still others make no mortgages at all, have a diversified revenue stream and are only guilty of being called banks. Finally, there are banks that have a large percentage of their revenues from international lending. Smart investors will look for all of these types and start investing a small amount in several of them, then wait for the rally that will inevitably come.
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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After a very eventful first trading day of 2008 that saw 
Ted Allrich is the founder of 
Analyst sees oil dropping to $50 on global economic slowdown
Lehman screws workers out of severance payments
No Cramer, now is not the time to panic!
