Daily Market Reports | Jul 18 2008
By Greg Peel
The Dow rose 207 points or 1.9% while the S&P rose 1.2% and the Nasdaq 1.2%. It’s a rare day that the Dow outperforms both other indices.
The reason it outperformed was because two of three components reporting second quarter earnings last night posted upside surprises. Coca-Cola shares fell 4% after the company posted a 23% loss for the quarter and showed disappointing volume growth. Manufacturing conglomerate United Technologies however, home to brands like Otis elevators and Carrier air conditioners, jumped 6% after declaring an 11% increase in profit.
But the biggie was JP Morgan, which twelve months ago was America’s #3 commercial bank but is now #1 following the disasters that have been Citigroup and Bank of America. JPM shares jumped 13% on the day.
It was a stunning result. The bank saw its income fall 53% in the second quarter compared to the second quarter last year to a loss of US$2bn, including a US$500m loss on the cost of taking over Bear Stearns and a US$2.2bn increased provision against loan losses. If that wasn’t enough to make a financial trader euphoric, CEO Jamie Dimon’s accompanying comments really sealed the deal.
“Our expectation is for the economic environment to continue to be weak – and likely to get weaker – and for the capital markets to remain under stress”, Dimon told an enthralled Wall Street. He added that the prime mortgage market “looks terrible”, and that defaults in California and Florida “could triple”. They lapped it up.
Jamie Dimon has a history of buttering up analysts for poor expectations, and then surprising. The reason such a shocking-sounding result was taken as positive is firstly because JP Morgan’s credit security write-offs were not as bad as its competitors are posting (stay tuned to the end of this report), but most specifically because the Street had pencilled in a US44c EPS and JPM came up with US54c. Mission accomplished.
The result added more fuel to the two-day financial sector rally, which has mostly been driven by short-sellers scrambling to cover positions ahead of the start of the moratorium on naked short selling on Monday. More fuel was added when ratings agency Fitch downgraded only Fannie Mae’s preferred stock, and only put Freddie Mac on negative credit watch. This was great news too.
But the real fuel in the broad market was fuel – oil fell another US$5.31 to US$129.29/bbl, bringing three-day losses to nearly US$16/bbl. The US government announced that for the first time in thirty years it was planning to open an embassy in Iran, which is seen as a further movement towards stability in the geopolitical environment, but more importantly oil responded to a big and unexpected jump in natural gas inventories which saw natural gas fall 7.6% on the day.
The US dollar was mixed, allowing oil free reign. The greenback rose against the carry-trade currencies (yen, Swiss franc) but fell against the euro and pound. This confused gold, which fell US$2.30 to US$957/oz. The Aussie fell a little further to US$0.9723.
Base metals on the LME closed largely steady with mostly small gains.
The US economic data for the night was also taken as a positive, despite being mixed. Construction starts on houses fell 5.3% in June, but starts on apartments rose 9.1%. Weekly jobless claims rose by 18,000, however more were expected. The Philadelphia Fed index of economic activity, which in any other day can move the market all by itself, rose from -17.1 to -16.3, but analysts were hoping for -16.0.
The SPI Overnight rose 37 points.
It doesn’t end here. This is result season, and often a lot of the action happens immediately after the bell. Early this morning we heard results from Dow component IBM, and from Google, Microsoft and Merrill Lynch.
IBM blew the Street away with a 22% profit increase for the quarter, however what was supposedly a big upside surprise has failed to ignite the share price. While all other stocks have been running amok, IBM was up 0.5% ahead of the result and down 0.5% after.
Google, on the other hand, had a shocker, turning a steady day into down 8% in the after-market. Microsoft’s result was similarly ill-received, and its shares have fallen 6% after being 1% up on the day.
Merrill Lynch shares were up a solid 10% in the general excitement of the day session, but have fallen 7% after the result. Merrills posted a US$4.9bn loss for the quarter – its fourth consecutive loss – and write-downs of a whopping US$9.4bn. The Street was expecting an EPS loss of US$1.91, but Merrills delivered US$4.97. Immediately following the result, Moody’s downgraded Merrills’ debt.
That might put JP Morgan’s result back into perspective. What we are clearly seeing, however, is the strong getting stronger and the weak getting weaker. JP Morgan went into the credit crunch as the most highly respected of all the commercial banks, and has managed to pull through less savaged than its peers. As a result, it is picking up market share and its revenue growth result was sound. Merrills, on the other hand, was considered #3 of the top five investment banks, with #5 now gone (to JP Morgan) and #4 (Lehman) hanging on by the skin of its teeth. Merrills is also on the danger list.
