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.
TheStreet.com's Jim Cramer says they're not just the opposite of longs -- they have the power to destroy companies.
Today will be riotously ugly. Today's a day where you could take down a Capital One (NYSE: COF) (Cramer's Take) or a Citigroup (NYSE: C) (Cramer's Take) -- some bad credit card exposure there -- off of American Express (NYSE: AXP) (Cramer's Take). You can bang down Nat City (NYSE: NCC) (Cramer's Take) into oblivionville off of it and hammer Merrill Lynch (NYSE: MER) (Cramer's Take) to the point where you could hear the rumors fly of capital needs. Freddie (NYSE: FRE) (Cramer's Take), merciless Freddie, right at ya. Today's the day when the uptick rule would be the only friend to the notion of owning stocks without fear every minute, fear that they will break your stock. Today's the day that the uptick rule can save Lehman (NYSE: LEH) (Cramer's Take) from $14 or lower. Today's why we need it.
Yet, every time I do a piece that talks about the need to reinstate the uptick rule or enforce the naked short laws, I am immediately greeted with the same nonsense: why should the longs get protection the shorts shouldn't? In fact, other than the usual gang of two -- Patrick Byrne and David Patch -- I don't get any positive feedback on these pieces like the one I did last night on "Mad Money."
Wachovia (NYSE: WB) is recently up 68 cents to $13.65. WB is scheduled to report Q2 EPS on July 22. WB call option volume of 50,778 contracts compares to put volume of 61,557 contracts. WB August option implied volatility of 141 is above its 26-week average of 58 according to Track Data, suggesting larger price movement.
A lot of investors think that the house Sandy Weill built has too many rooms. Citigroup (NYSE: C) operates financial divisions for everything from banking in South America to commodities trading in New York. Many shareholder think that some of these businesses would be better off on their own and that Citi could sell them for nice premiums.
Current management at the big financial company obviously thinks keeping Citi together is a good idea. So far, there has been no move to spin out, or auction off, any of the firm's really large divisions.
Management's reluctance to change the face of Citi has not kept the American Federation of State, County and Municipal Employees -- a big U.S. union -- from starting a push to pull the financial company apart. According to the FT, "In a letter sent on Friday to Sir Win Bischoff, Citi chairman, Gerald McEntee, Afscme's president, urged Citi's board to "restore shareholder value that is currently trapped in the sprawling financial supermarket approach.""
The board and management at Citi will ignore the plea, and that is too bad. Even though Wall Street was glad that the company's last set of earnings were not worse, they were certainly bad enough. Some analysts see Citi losing money for several more quarters as it continues to write down investments that have been damaged by the credit crisis.
It is hard to defend keeping assets like Smith Barney when they are likely to fetch a large enough sum to shore up Citi's balance sheet. That logic has escaped the powers that run Weill's creation, which is too bad for anyone who has watched the value of Citi drop by more than 50% in the last year.
Douglas A. McIntyre is an editor at 247wallst.com.
People with the matter said that Ken Wilson, The Goldman Sachs Group Inc's (NYSE: GS) most senior financial-institutions broker, will temporarily exit the firm, the Wall Street Journal reported, in an effort to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis.
The American Federation of State, County, and Municipal Employees, a union with a stake in Citigroup Incorporated (NYSE: C) called for the financial services company to break itself up. The Financial Times reported that the demand will almost definitely be rejected by Citigroup.
OTHER PAPERS:
Treasury Secretary Henry Paulson's plan for rescuing Federal National Mortgage Association (NYSE: FNM) -- Fannie Mae -- and Federal Home Loan Mortgage Corporation (NYSE: FRE) -- Freddie Mac -- calls for the creation of a new regulatory agency that would seek to assert more stringent control over the banks and lessen the damage they could cause to the American financial system, the New York Times reported.
The Daily Telegraph reported that BP Plc (NYSE: BP) blocked a $1.8B dividend payment to its Russian partners in the TNK-BP joint venture.
WEB SITES:
According to paidContent.org, now that its cash on hand exceeds its market cap, speculation that Napster Inc (NASDAQ: NAPS) could be a takeover target heated up.
When the new stadium for The New York Mets opens next year, it will be called Citi Field. Given the number of the financial firm's employees who are out of work and the large numbers who will be fired in the future, the Citigroup (NYSE: C) name on the park borders on cruelty.
According to The New York Times, "With high name recognition and a place among the world's banking leaders, Citigroup hardly needed the Citi name plastered on a ballpark to enhance itself." The arrangement runs for 20 years and has a total cost of $400 million.
The naming rights hardly seem like a good idea for Citi's shareholders.
Although the bank's stock has recovered somewhat recently, shares are still at only $19.35 compared to a 52-week high of $52.18.
The decision to move ahead with the deal calls into question, once again, the judgment of Citi CEO Vikram Pandit and his management. A firm losing billions of dollars a quarter hardly seem a candidate for being caviler with its cash.
Douglas A. McIntyre is an editor at 247wallst.com.
The New York Times reports that Citigroup (NYSE: C) plans to commit $400 million to its naming rights deal for the stadium of the New York Mets. I say stop this deal!
Why? There are so many examples of companies that got into trouble after they named stadiums after themselves. In Boston, the stadium where the New England Patriots play was named after Gillette -- but Gillette doesn't exist anymore -- Procter & Gamble (NYSE: PG) bought it in 2005. And we had the Fleet Center, where the Boston Celtics play -- but Bank of America (NYSE: BAC) bought Fleet in 2003. And we also had the Tweeter Center, a concert venue -- named after Tweeter Home Enterprises which filed for bankruptcy last June. Fortunately, Boston's other world championship team, the Red Sox, has the good sense to deny naming rights to any company for its Fenway Park.
Now for Citi. According to the Times, it made its 20-year deal for the Mets naming rights back in November 2006 under previous CEO, Chuck Prince, after netting $5.3 billion in 2006's third quarter. But in the past three quarters, it has lost $17 billion - including a $2.5 billion loss reported on Friday.
The chairman of Citigroup (NYSE: C), Win Bischoff, said that housing in the U.S. and UK will probably fall for another two years. According to Reuters, "He also said he expected the credit crunch could continue through until 2009.
What was not said is that there can probably be no banking recovery while housing remains in trouble. The value of mortgage-backed paper cannot stabilize. A housing "depression" will make it extremely difficult for GDP to do anything other than move down.
Housing and oil remain the two most critical factors in the ability of the economy to make any comeback. Oil is down some, but unless its stays well below $120, it is hard to imagine that gasoline and petrochemicals will drop to an affordable level.
The value of housing has such a powerful effect on sectors from retail to automotive that Bischoff is essentially saying the the present climate will get much, much worse.
Douglas A. McIntyre is an editor at 247wallst.com.
Back in the early 1990s, the U.S. was mired in a recession and the money center banks were in dire straits. But, of course, it was a great opportunity for investors.
So, are we seeing a repeat? Perhaps so, although, you still need to tread carefully. This is according to a front-page piece in Barron's [a paid publication].
And yes, this week has been particularly encouraging, as seen with a widespread rally in the financials. It certainly helped that there was strength from Wells Fargo (NYSE: WFC) and JPMorgan (NYSE: JPM). At the same time, the results from Citigroup (NYSE: C) weren't as bad as expected.
By any measure -- such as price-to-book values and P/Es -- the financials look extremely cheap. Besides, these companies are taking quick medicine in terms of write offs. In other words, once financials report next year, the comparisons should look strong.
Something else: the Securities and Exchange Commission has implemented new rules on short selling (regarding 19 financial companies). Ultimately, this may relieve some of the volatility.
Today might have been one of the more boring options expiration dates. If you pretend that technology stocks weren't a part of the market, today was rather stable considering the major bounces we have seen. Oil stayed under $129.00 per barrel, which didn't give the bears much meat to chew on. We had essentially no government economic data today. Here are today's unofficial closing levels:
Apple Inc. (NASDAQ: AAPL) is set report earnings after the close of trading. Read a FULL EARNINGS PREVIEW. Shares of Apple were down over 3% at $166.10 in today's final minutes of trading.
Which States Are Helping Homeowners Battling Foreclosure? Frustrated by the slow pace of federal relief, states around the country are pouring hundreds of millions of dollars into their own programs to stem the rising tide of home foreclosures. See if your state is stepping up to the plate. States battle mortgage foreclosure threat; see chart - USATODAY.com
In the expectations game, Citigroup (NYSE: C) $2.5 billion loss is great news for Wall Street. Bloomberg News reports that the analysts it surveyed expected a $3.67 billion loss, or 54 cents a share -- so Citi's results were $1.2 billion better than expected. But there were wide variations on what analysts expected Citi to lose -- from 51 cents to 67 cents.
This reminds me of the story of the boy who comes home from school to tell his mother about a grade he got on a test. Rather than bow his head in shame, he walks into the kitchen with head held high and a big smile on his face. And he announces: "Great news mom! I got a 70!"
The key reason for Citi's loss is the $7 billion in credit-related write-downs it took. These included reductions in the stated value of its subprime mortgage exposure and its investments in monoline insurance companies including Ambac Financial Group Inc. (NYSE: ABK) after they lost their AAA credit ratings. Analysts expected write-downs as high as $12 billion.
U.S. stock futures turned higher Friday morning after earnings from Citigroup that beat expectations offset disappointment from Merrill, Google and Microsoft. There was also some pressure from oil as prices rebounded to above $131 a barrel, following Nigeria cutting output.
Many on Thursday started wondering if we have seen the bottom. Stocks rallied for a second straight session as oil continued its price drop. Better -than-expected earnings for JPMorgan Chase (NYSE: JPM) again lifted banks. The Dow Jones Industrial Average gained 207.38 points, or 1.9%, the S&P 500 index rose 15.7 points, or 1.2%, and the Nasdaq Composite Index gained 27.45 points, or 1.2%.
Without any economic releases today, the market will continue to focus on earnings, and investors have a lot to mull, especially after Thursday's wave of financial results releases after the close, and with financials and techs being in the center of attention.
After JPMorgan Chase brought on some optimism with its results Thursday morning, Merrill Lynch (NYSE: MER) reported after the close a wider-than-expected loss of $4.65 billion, or $4.9 a share, on $9.7 billion of credit-market writedowns. The loss per share was larger than any analyst had expected according to Bloomberg survey. MER shares are declining over 4.8% in premarket trading.
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. 
Wachovia 
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Back in the early 1990s, the U.S. was mired in a recession and the money center banks were in dire straits. But, of course, it was a great opportunity for investors.
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U.S. stock futures turned higher Friday morning after earnings from Citigroup that beat expectations offset disappointment from Merrill, Google and Microsoft. There was also some pressure from oil as prices rebounded to above $131 a barrel, following 
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