Banking Woes Clobber StocksWill Andrews
If he wanted to get a sense of the depth of the challenges he faces on his first day in office, the newly inaugurated 44th U.S. President just had to take a quick look at the stock ticker Tuesday.
U.S. stocks plunged Tuesday, with major financial issues getting clobbered with double-digit percentage losses. Investors focused on mounting problems in the banking system -- this time courtesy of bleak earnings news from State Street Corp. (STT) and Royal Bank of Scotland (RBS) on the day Barack Obama officially became U.S. President.
Obama called for using "hope over fear, unity of purpose over conflict and discord" to combat the worst economic crisis since the Great Depression, says S&P MarketScope. In his inauguration speech, Obama called for a new era of responsibility.
"The new era will be hampered at the outset by the need to raise trillions to stimulate the economy and bail out the banking system," notes S&P MarketScope.
On Tuesday, the 30-stock Dow Jones industrial average finished lower by 332.13 points, or 4.01%, at 7,949.09. Steep drops in JPMorgan Chase & Co. (JPM) and Bank of America (BAC) helped push the Dow industrials below 8,000, although all 30 Dow component stocks lost ground.
The broader S&P 500 index dropped 44.90 points, or 5.28%, to 805.22.
The tech-heavy Nasdaq composite index was the hardest hit of the major U.S. market benchmarks, tumbling 88.47 points, or 5.79%, to 1,440.86.
There were few places to hide in the market. On the New York Stock Exchange, 28 stocks were lower in price for every three that gained. Nasdaq breadth was 23-4 negative.
The VIX equity volatility index, the stock market's widely followed "fear gauge", jumped nearly 22% to 56.37 Tuesday afternoon from Friday's close of 46.11.
Prices for U.S. Treasuries sank Tuesday on worries the U.S. and UK governments will have to borrow heavily to boost the economy, which will leave deficits for years to come. The 10-year yield climbed to 2.36%. The dollar index was higher -- and the pound sterling and euro sharply lower -- after the U.K. unveiled a financial services rescue plan and Royal Bank of Scotland warned of a massive 2008 loss. Gold futures were higher amid reports of bank buying. Oil futures were mixed as the February WTI contract expired.
There were no significant economic reports released Tuesday.
There is much concern about the challenges the new administration faces in stimulating the economy out of a severe recession, says S&P.
The Obama White House released a broad overview of its U.S. economic recovery agenda on Tuesday. The plan looks to jump-start growth via 1) doubling the production of alternative energy; 2) modernizing more than 75% of federal buildings, 3)making the immediate investments necessary to ensure medical records are computerized within five years, 4) equipping schools with 21st century technology, 5) expanding broadband across America, 6) investing in science, research, and technology, reports Action Economics. .
After the latest capital injections in Citigroup (C) and Bank of America last week and confirmation of a $41 billion loss for the Royal Bank of Scotland in the UK over the weekend, losses in the financial sector show few signs of letting up, notes Action Economics.
The S&P Asset Management & Custody Banks industry index sank 21% Tuesday, while the Diversified Banks index also fell 21%. The S&P Other Diversified Financial Services index tumbled 23%; the Regional Banks index slid 18%.
Shares of BofA were down sharply Tuesday after an analyst downgrade, while other major lenders like Citi, Wells Fargo (WFC), and Goldman Sachs (GS) were also significantly lower.
Shares of State Street Corp. (STT) lost over 50% of their value Tuesday after the company posted fourth quarter earnings per share (EPS) of 15 cents, vs. 57 cents one year earlier, despite an 8% revenue rise. State Street posted $1.18 fourth-quarter operating EPS. Reflecting ongoing illiquidity in markets at Dec. 31, 2008, the company said that aftertax, unrealized mark-to-market losses in its investment portfolio increased to $6.3B. The company expects 2009 revenue to be approximately flat with 2008, down from its long-term goal of 8%-12% growth; and 2009 operating EPS to also be about flat with 2008, below its long-term goal of 10%-15% growth.
Standard & Poor's Ratings Services lowered its ratings on State Street debt one notch to A+ from AA-, with a negative rating outlook.
Regions Financial (RF) shares were sharply lower after the company posted a fourth-quarter non-GAAP loss of 35 cents per share, vs. 24 cents EPS one year earlier, on an 11% drop in net interest income. Wall Street was looking for a loss of 8 cents. The company noted that net loan charge-offs rose to $796 million, or to an annualized 3.19% of average loans, from $416 million in the third quarter; the provision for loan losses increased to $1.150 billion, $354 million above net charge-offs and $733 million higher than the third quarter.
PNC Financial (PNC) shares tumbled Tuesday. S&P Equity Research downgraded PNC to hold from buy, noting that PNC shares are down sharply this month, as investors flee most bank stocks due to general concerns about oversized loan-loss provisions, securities write-downs and possible dividend cuts. S&P lowered its estimates and price target for PNC.
Bank of New York (BK) shares also fell sharply Tuesday. The company rescheduled its fourth-quarter financial results conference call to 5 p.m. EST Tuesday from its previously scheduled date of Jan. 22. The company said its Tier 1 Capital Ratio was expected to be 13.1% vs. 9.3% at Sept. 30, 2008, and the Tangible Capital Equity Ratio is expected to be 3.8% compared to 3.9% at Sept. 30.
MGIC Investment (MTG) posted a $2.21 fourth-quarter loss per share vs. an $18.17 loss one year earlier on a 3.1% revenue rise. Wall Street was looking for a loss of $1.14. The company said losses incurred in the fourth quarter were $903.4 million, reflecting a continued increase in the number of delinquent loans, up from $788.3 million in the 2008 third quarter.
TD Ameritrade (AMTD) posted first-quarter EPS of 31 cents, vs. 40 cents, on a 4.8% revenue drop. The company adjusted its fiscal 2009 EPS guidance to 90 cents-$1.15.
In brokerage moves Tuesday, Stifel downgraded Bank of America to hold from buy.
Fox-Pitt reportedly cut its estimates for JPMorgan Chase, saying that JPMorgan Chase is not immune to the deteriorating credit environment. Fox-Pitt is keeping its outperform rating on JPMorgan Chase.
Friedman Billings Ramsey cuts its estimates and price target for Wells Fargo. FBR believes Wells will have to cut its dividend, if not this quarter, then sometime in the 2009 first half. FBR reiterated its underperform rating on Wells shares.
New York University economics professor Nouriel Roubini said Tuesday that the global banking system is technically insolvent, according to a Bloomberg report. Action Economics notes that Roubini has been a vocal "perma-bear" on the banking system, stocks and the economy.
The Wall Street Journal reports Italy's Fiat SpA and Chrysler LLC, in an attempt to revive two of the world's storied auto makers, are poised to announce a partnership as soon as today in which Fiat could take control of the U.S. company's operations, people familiar with the matter said. Under terms of a pact that is being hammered out, Fiat is likely to take a 35% stake in Chrysler by the middle of this year. It would have the option of increasing that to as much as 55%, these people said. Fiat, the stronger of the two, wouldn't immediately put cash into Chrysler. Instead it would obtain its stake mainly in exchange for covering the cost of retooling a Chrysler plant to produce one or more Fiat models to be sold in the U.S., these people said. Fiat would also provide engine and transmission technology to help Chrysler introduce new, fuel-efficient small cars, they said.
The New York Times Co. (NYT) raised $250 million from Mexican billionaire Carlos Slim after agreeing to pay an interest rate of more than 14%, the latest in a series of moves by the newspaper publisher to shore up its finances, according to the Journal.
The pound dropped to a record low against the yen and breached $1.40 for the first time since 2001 as the U.K.'s second bank-bailout plan in three months raised concern the global financial crisis is deepening. The government of U.K. Prime Minister Gordon Brown said it will spend an extra 100 billion pounds ($142 billion) to support the nation's banks and increase its stake in Royal Bank of Scotland Group Plc. The euro was down as a German survey showed investors remained pessimistic about the outlook for the European economy.
OAO Gazprom, Russia's natural-gas exporter, resumed shipments to the European Union via Ukraine, ending almost two weeks of supply disruption, Bloomberg and Reuters reported. Deliveries started through the pipeline at Sudzha on the Ukrainian border. Shipments have already arrived in Slovakia, RIA Novosti reported, citing an unidentified person at a gas-measuring station on the border with Ukraine. Naftogaz spokesman Valentyn Zemlyanskyi couldn't confirm that Slovakia was receiving Russian gas yet, he said by phone. Gazprom and Naftogaz signed a 10-year contract yesterday in a ceremony overseen by Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Timoshenko. The agreement sent gas prices lower in the U.K., Europe's biggest market for the fuel, and pushed up Ukraine's hryvnia currency.
Among other stocks in the news Tuesday, Johnson & Johnson (JNJ) reported fourth-quarter EPS of 97 cents, vs. 82 cents one year earlier, despite a 4.9% drop in sales. The company set 2009 EPS guidance of $4.45-$4.55, which excludes the impact of special items but includes anticipated dilution of 3 cents-5 cents from the acquisition of Mentor Corp. (expected to close in January, 2009). J&J's guidance was seen as lower than expected, according to S&P MarketScope.
Forest Laboratories (FRX) posted third-quarter EPS of $1.03 (excluding items), vs. 96 cents one year earlier, on flat revenue. The company raised its $3.30-$3.40 fiscal 2009 EPS view to $3.35-$3.45.