Daily Market Reports | Jul 23 2008
By Greg Peel
The Dow closed up 135 points or 1.2% while the S&P added 1.4% and the Nasdaq 1.1%. At around 3.10pm all indices were relatively flat.
It was a game played in two halves last night on Wall Street, as a perceptive rugby league player might suggest, except that the first half lasted from 10am to 3.10pm and the second from 3.10pm to 4pm. On the opening bell the Dow was down 80 points, driven by the poor earnings reports emanating from the late market on Monday including that of American Express. And then Wachovia chimed in.
Wachovia (pronounced “walk over ya” and not “watch over ya”) is the fourth biggest US commercial bank after the triumvirate of Bank of America, Citigroup and JP Morgan. All of those three have posted better than expected second quarter results so far, but that was not to be the case for Wachovia. Wachovia posted an absolute shocker.
The bank announced a loss of nearly US$9bn in the quarter, with an earnings per share loss of US$1.27 against a consensus estimate of US$0.78. It wrote down a further US$6.1bn in dodgy credit securities and put US$5.5bn away as a provision against loan losses. It cut its dividend from US37.5c to US5c. Immediately on the release, all of S&P, Moody’s and Fitch downgraded Wachovia’s credit.
Shares in Wachovia immediately fell over 10%, taking them to their lowest level since 1991. However, it is always darkest just before the dawn, and in the case of Sydney this week: always bloody freezing just before the dawn. The buyers moved in.
Inspiring the buyers was the announcement that despite the result, Wachovia would not be looking to raise any new capital. Instead it would exit the wholesale mortgage market, cease dealing with mortgage brokers, and lay off some 10,000 staff in the first move of a cost-cutting plan. Wachovia shares rallied to be up about 6% on the day, and then settled for the time being.
The rest of the indices followed Wachovia’s lead, spurred on by Street-beating results from Caterpillar and Dupont (both citing increased offshore sales on a weaker US dollar), and by the fact that the oil price had begun to drift lower. The oil price drifted lower because Tropical Storm Dolly had begun to drift away from the oil rigs in the Gulf and looked to be set to cross land south of the danger area, and peter out.
This then set the tone for most of the session, with all indices mildly higher. Late in the afternoon, two things occurred. Firstly, Philly Fed president Charles Plosser came out and said that the Fed cash rate would need to be hiked sooner rather than later. That sent the greenback on a run, and consequently tipped an already weak oil price over the edge. Oil fell US$3.09 to US$127.95/bbl by the end of the session.
Wachovia’s turnaround had already brought some interest back into the banks, but when the respected bank analyst from Deutsche Bank issued a report late in the day suggesting it was time to “reduce the underweight” on the financial sector, the dam broke. Mark Mayo noted that most banks had not issued new capital in the second quarter, that margins had improved more than expected, and that problems had not spread as far as one might have thought. The shorts were sent scrambling once again.
So quickly were the shorts caught out that Wachovia – the company which had just announced a loss 63% worse than expected, finished the day up 27%. And Wachovia took the banking index with it. On oil and banks, the indices posted their final half-hour surge. To put the scramble into perspective, shares in UAL – parent of United Airlines – closed up 66%.
It was not a good finish for gold. It fell US$20.80 to US$944.70/oz, indicating that while oil continues to pull back to a more realistic level any consideration that the US is technically insolvent will have to wait. The Aussie also had its wings clipped, slipping back half a cent to US$0.9715.
The wind also came out of the base metal sails, with all bar lead closing down mildly. Lead rallied 4%.
The SPI Overnight closed up 34 points.
And then we turn to the after-market.
Yahoo posted its result after the bell, and mostly disappointed. Its shares were down over 1% in late trade. But the real attention was on the largest US thrift, Washington Mutual.
The WaMu result and response was an encore of Wachovia. The bank posted an earnings per share loss of US$3.34 compared to consensus of US$1.05. It also said losses in its remaining mortgage portfolio would be to the “upper end” of guidance provided in April. The shares immediately tanked 7%. But WaMu’s CEO also said the bank had sufficient capital “to manage through this challenging period”. On that note, the shares reversed and were up 6%.
The US market is clearly very short, and otherwise loaded up in cash. Investors are looking for any little reason to get back in, fearing they may miss the greatest market bottom of all time. An oversold market needs to rally occasionally, and perhaps rally strongly, but the snap-back in financials has been incredibly fierce. It’s not that banks have yet offered much in the way of light at the end of the tunnel, and the housing market continues to slump. The lower the housing market goes, the more write-downs will follow. Even US Treasury secretary Hank Paulson agrees the US housing crisis has a long way to go.
