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After knee jerk reaction, stocks stabilize

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While the company that helped spark this morning's rather sharp sell-off finds its stock still halted for trading, the impact of WorldCom's (NASDAQ:WCOM) $0.83 announced fraudulent accounting scheme is having a negative impact on some banking stocks today.

Those impacted most are found in the KBW Bank Index (BKX.X) 797.03 -3.06%, which comprises the bulk of the larger money- center/multinational/super-regional type lending banks.

In a research note out of Goldman Sachs this morning, that first estimates that WorldCom (WCOM) bank debt would trade down to 15- 20 cents on the dollar from the mid-80's level found yesterday, given the much lower cash flows now at WCOM and that the banks will no longer receive collateral as had been widely anticipated. Goldman Sachs estimates that a "mark to the market" earnings hit would be most meaningful to Mellon Financial (NYSE:MEL) $29.85 - 7.29% ($0.07 or 3.5% of 2002 earnings), JP Morgan Chase (NYSE:JPM) $30.90 -6.16% (nearly 2% of earnings), FleetBoston (NYSE:FBF) $30.79 -1.78% (nearly 2% of earnings), Bank One (NYSE:ONE) $36.39 -2.9% (1% of earnings) and Bank of America (NYSE:BAK) $67.84 -3.12%. All of these stocks listed in Goldman's "WorldCom Exposure List" are components of the KBW Bank Index (BKX.X).

Bank of America Chart - $1 box

While the above chart doesn't show an "O" at $58, BAC has traded that level in the past hour and aggressive bears can be looking to short/put the stock at current level and targeting the $54 level near-term. The trade at $68 turns the vertical count back to bearish and hints at a longer-term bearish price objective of $61. Since stock is currently in an upward trend, I'd only be looking at 1/2 positions at current levels.

The major market averages haven't seen the dramatic declines that some may have thought. The Dow Industrials are down roughly 1.5%, S&P 500 Index (SPX.X) is down 1.6%, NASDAQ Composite is weaker by 1.5% and the smaller cap Russell 2000 (RUT.X) is down just 0.95%. This has had some floor traders thinking that there has been little sign of capitulation, which may have the broader markets seeing further downside in the weeks to come. Many wanted to see a "flushing" of stocks for the thought that a bottom could be put in.

Jeff Bailey
Senior Market Technician
Option Investor

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