What, we didn't see this coming?
The market tanked Wednesday, as you know, closing with its biggest drop in over a month, largely on deep concerns that tighter lending standards in China could throw sand in the gears of our already-slow recovery. Investors are worried about how badly a slowdown in China's huge economy would affect us and other countries, not to mention what it would do to commodities, what with China being a very critical buyer in that market.
Investors are also wondering whether a 68% gain in the S&P500 index over the last 10 months has been, as the old song told us, too hot not to cool down. Those doubts are not disappearing as ever more companies report results from the last three months of 2009. So far, revenues are mostly weak and cost-cutting has again sprung to the rescue. "We might see profitability out of companies this season but we're not really seeing revenue growth," said one Chicago analyst, about summing it up.
All things considered, though, it wasn't the end of the world. The three major indexes, while all down over 1%, finished well off the day's lows, the Nasdaq, for example, rising 44% off its floor of the day. In a charitable mood you might even call that long-legged doji a harbinger of support. The Nasdaq closed at 2,291.15, off 29.25 or 1.26%:
NASDAQ: Made a decent recovery, like the other majors:
Disappointing revenue and a cautious outlook despite better-than-expected profit came from IBM after the close Tuesday, which helped take the market, and IBM, down at the open; early results from Morgan Stanley compounded the gloom.
Thanks in part to Bank of America's (BAC) news of stable credit costs, and good results out of U.S. Bancorp (USB), State Street (STT) and Wells Fargo (WFC), banks were the one remotely bright spot -- although one bank wearing a dunce cap was Morgan Stanley (MS), coming in short of consensus.
Health care held up relatively well, finishing the session just 0.5% lower, despite concern that health care stocks will get the jitters if health care reform efforts stall, as they may for the time being with the election of Scott Brown (R. Mass.) to the Senate Tuesday.
Energy stocks suffered the most this session, dropping 1.7% as a group as oil prices slid almost to $77 a barrel.
INDEX WRAPUP, Jan. 20, 2010: Down, but a valiant recovery anyway for the major indexes
There was a nice batch of better-than-expected earnings reports Wednesday, about which more below, but nobody seemed to care much. Worries about the artificially-induced slowdown of China's economy trumped the good news. The dollar jumped over 1% against a "basket" of rival currencies, pressuring commodity prices and causing pain for stocks of energy companies and many materials producers. Money moved into traditionally safe bets like government debt, which lowered Treasury yields.
Broad-based weakness pushed the stock market down as much as 1.8% at one point, but the S&P rallied to close at 1,138.04, down 12.19 or 1.06%:
Declining issues and volume wildly outshone advancers but interestingly, a number of companies made new highs:
The Dow Jones industrial Average fell from a 15-month high, losing 122 points or 1.14%. At two points during the session the Dow was off over 200 points but it ended sharply off its lows of the day at 10603.15.
DOW JONES INDUSTRIAL AVERAGE:
The Russell 2000 index of smaller companies also regained some of its poise, ending down 9.54 or 1.47% to 639.61, after trading as low as 633.
Gold prices fell almost $28 or 2.44% to $1,111.86 an ounce. Doubtless owing to the results of the special Massachusetts senate election, the dollar rose, reaching level not seen against the euro since last September. The gain in the dollar pushed commodity prices lower because a stronger greenback makes them more expensive for foreign buyers. Crude oil, for example, was trading after hours as low as $77.15 per barrel, off $1.87 or 2.37%. A graph of the greenback, looking for a change like a safe investment, is worth looking at:
THE DOLLAR ROARS BACK:
Returning to China before we turn to earnings -- last week stocks fell after China tightened its monetary policy and increased the amount banks need to hold in reserve; Tuesday the Chinese government hiked rates on one-year Treasury bills. A top banking regulator said Wednesday that China will be very closely monitoring banks in its attempt, not misguided, to prevent speculative bubbles in areas like real estate and generally put a few controls on the country's growth. (You could almost hear them saying under their breath, "Don't expect us to repeat your mistakes, USA.") China's economy grew 8.5% in 2009 and is on track to grow 9% this year, at least according to the International Monetary Fund. Even with slowing growth, it's by far the fastest- growing economy in the world. You have to admire the country, even if grudgingly, for working to keep that train from derailing.
Chinese stocks were not impervious to the news. Every exchange traded Chinese fund fell Wednesday, continuing a run of down days. FTSE/Xinhua China (FXI) is China's version of the Dow and the most widely traded China ETF. (It had "only" a 59% gain over the past year, the lowest of all China exchange-traded funds.) It fell $1.68 or 3.7%.
FTSE/XINHUA CHINA (FXI):
Tech bellwether IBM's results were covered in last night's column so no more need be said there other than what the stock did today, which was gap down and pretty much stay down on huge volume. The company has managed through the recession by cutting costs and shifting more of its business into lucrative software and services, away from low-profit hardware such as PCs. In fact, software and services accounted for 78% of IBM's revenue last quarter. Global IT spending is forecast to grow 5% this year compared with a 10% decline in 2009 but because IBM is such a goliath, sales are predicted to rise only about 3% this year, below the industry average:
INTERNATIONAL BUSINESS MACHINES:
It's still not easy being a banker, and a feeble economy and a metric ton of bad loans are still troubling Bank of America, who reported a fourth-quarter loss of $5.2 billion or 60 cents a share, disappointing analysts who were waiting to see a loss of 52 cents. It was four cents more than Q408's loss. For the year the bank lost $2.2 billion or 29 cents per diluted share, sadly down from the previous year's gain of $2.6 billion or 54 cents; the loss for the year was nearly triple the 10-cent target of securities analysts.
The fourth-quarter loss reflected a one-time expense of $4 billion related to the repayment of $45 billion in Troubled Asset Relief Program to the government. Net interest income declined 11% from last year's Q4, but what can one expect in a weak lending environment while dealing with nonperforming loans. In Q4 the bankâ€™s nonperforming assets â€” loans no longer generating revenue â€” increased to $35.7 billion or 3.98 percent of all loans, up from $33.8 billion in the third-quarter.
It wasn't all bad: Charge-offs were lower at a mere $8.4 billion, down over $1 billion from the previous quarter. Noninterest income rose to $13.5 billion from $2.6 billion a year earlier. Higher trading profits, investment and brokerage fees and investment-banking income reflected the acquisition of Merrill Lynch & Co. last year. The bank repaid TARP and started to strengthen its balance sheet through successful securities offerings. The bank said credit conditions were improving, but in effect advised investors and others not to get too excited too soon. The market decided to give BAC a break; it added 17 cents or 1% to $16.49 and remained above what looks like support around $16.
BANK OF AMERICA, getting A for effort:
In a mirror image, Wells Fargo & Co. reported a quarterly profit of nearly $3 billion Wednesday, but the stock lost ground on concern about rising charge-offs. The bank saw fourth-quarter net income of $2.82 billion or 8 cents a share, up from a loss of $2.73 billion or 84 cents a share in Q408.
The company was expected to lose on average 1 cent a share, with forecasts ranging from a profit of 10 cents a share to a loss of 16 cents a share. Revenue came in at a record $22.7 billion, up 4% from the third quarter and cause for popping champagne corks, given the flatness of so much revenue so far this season. For the year, Wells Fargo generated record net income of $12.3 billion on record revenue of $88.7 billion.
The bank raised more than $12 billion selling new shares in December to help repay $25 billion in TARP funds, which knocked 47 cents a share off earnings. Net income also included a $500 million credit-reserve build as Wells Fargo sets aside more money to cover bad loans; the results also included $450 million in merger costs and several other one-time items. Wells Fargo said it generated mortgage banking income of $3.4 billion in the fourth quarter. Trust and investment fees came in at $2.6 billion, up 16% from the third quarter, as client assets increased and revenue from the bank's retail securities-brokerage business climbed.
But then came news of the bank's net charge-offs of $5.4 billion or 2.71% of average loans, up from $5.1 billion or 2.5% of average loans in the previous quarter, partly due to the Wachovia acquisition. Uh oh. Even though charge-offs were occurring at a slower rate, analysts didn't like that $5.4 billion charge-off at all, noting that it will be a drag on any real earnings growth. The stock, up almost 50% over the past year, got only a slight cold:
Brinker International's (EAT) second-quarter results tell us the chain's new menu items and promotions could well lure its customers back following several slow quarters at its Chili's, On the Border and Maggiano's restaurants. As for Romano's Macaroni Grill, it now owns a minority stake there.
A better-than-expected profit for the quarter despite sliding sales sent shares nicely up Wednesday. Including the costs related to selling most of Macaroni Grill, profit totaled $18.3 million or 18 cents per share compared with a loss of $21.8 million or 21 cents per share last year; revenue, down due to the sale, fell 18% to $782 million. That was actually an improvement from the same-store (locations open at least a year) sales declines over the past year. Exclude the Macaroni Grill-selling costs and income was 29 cents, nicely beating analysts' expectation of 22 cents; revenue exceeded hopes as well.
Promotions always nibble on margins and food costs are higher, but Brinker offset most of that by slicing operating costs and expenses by an impressive 23% and even slightly increased its margin. Investors ate it up, adding $1.95 or 12.74% to the share price.
BRINKER INTERNATIONAL investors got hungry today:
Morgan Stanley (MS) reported quarterly profit that lagged analyst estimates, citing strong investment banking results but weak trading. Q4 income reached $617 million or 29 cents a share, better than last year's alarming net loss of $10.95 billion or $11.35 a share, on revenue of $6.8
billion. Analysts would have preferred 36 cents on $7.81 billion. Lately Morgan Stanley has been trying to make up for over-conservativeness in 2008 by putting more capital at risk and hiring more traders, but fixed income sales and trading both under-performed during the fourth quarter. The stock lost 53 cents or 1.7% to close at $30.63 . . . . U.S. Bancorp's (USB) Q4 profit doubled, helped by a rise in fee income; USB is one of the ten largest U.S. banks. Profit hit $602 million or 30 cents a share from $330 million or 15 cents a share a year earlier. U.S. Bancorp has (so far) avoided serious loan losses during the credit crisis because of its conservative underwriting standards. At a time when other banks are coming under fire for lending less, U.S. Bancorp said it built its loan portfolio to $191 billion in the quarter, up $14.4 billion from a year ago. The bank also benefited as the difference between the rate it paid on deposits and the rate it earned on loans widened over the year. The stock was up over 2% today, capping a month-long runup.
US BANCORP -- slow and steady evidently wins the race:
Luxury-handbag maker Coach (COH) beat profit expectations and posted its first same-store sales gain in over a year, but Wall Street, natch, accentuated the negative as the company failed to meet same-store sales expectations and didn't issue detailed guidance. Coach earned $241 million or 75 cents a share, compared with $216.9 million or 67 cents, a year ago; analysts expected 72 cents. Sales rose 11% to $1.07 billion from $960.3 million, while North American same-store sales increased 3.2% -- the first comparable sales gain since September 2008. Even gross margin was up. Still, analysts predicted a 5.1% jump and were probably pouting because Tiffany announced higher-than-expected holiday sales last week and upped its guidance. The stock got clobbered:
COACH falls despite upbeat results:
After hours EBay (EBAY) earnings were announced. They soared in the fourth quarter, fueled by growth in the PayPal business, the sale of VoIP provider Skype and success in luring you to its sites during the holiday season. EBay reported net Q4 income of $1.4 billion or $1.02 a share, up from $367 million from the quarter last year. The company said revenue climbed 16% to $2.4 billion, helped by double-digit revenue growth for PayPal and Bill Me Later. Revenue on eBayâ€™s e-commerce sites increased 15 percent, to $1.5 billion. Sixty percent of that revenue came from outside the United States. EBay has been charging lower fees for European merchants to list items on the site. The total of all transactions except for cars increased 24% to $14.2 billion.
During the session Wednesday EBay shares fell $1.03 or 4.4%; in after-hours trading they were up rose $1.87.
A mixed housing bag. Low rates seem to be giving a boost to mortgage demand. The Mortgage Bankers' Association purchase index rose a healthy 4.4% last week; the refinance index jumped 10.7%. Thirty-year mortgages are averaging 5%, down 13 basis points in the week. It's much-needed good news after a spate of grim data like a plunge in pending home sales and the recent dip in the home builders' index.
Housing starts were posted Wednesday morning too, causing consternation among homebuilders, as they were down 4% in December after a 10.7% jump in November. The December dip was led by a 6.9% percent drop in single-family starts, following November's 4% rise. Meanwhile the multifamily component advanced 12.2% after a 69.8 percent surge the month before. Homebuilders are a bit happier regarding permits, which rebounded 10.9% percent in December after a 6.9% comeback the month before. The December pace of an annualized 653,000 units was up a very healthy 15.8% year over year. Both single-family and multifamily permits were up monthly in December, see graph below.
What the report tells us is that starts are volatile during the winter months. They're expected to improve in coming months, but there's no doubt that the housing recovery will be a long, slow one. There was scant reaction to the news, what with everything else the market had to digest.
PPI. The Producer Price Index for Finished Goods moved up 0.2% percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics told us Wednesday; this rise followed a 1.8% spike in November and a 0.3% increase in October. Both headline (overall) and core PPI inflation slowed sharply last month. The headline 0.2% number were higher than was hoped, but the core slowed more than expected, easing to a flat reading after jumping 0.5% in November; the market had expected a tenth of a percent uptick, so that's good.
The headline increase was led by a 1.4% jump in food prices as energy dipped 0.4%; the core was kept low in part by a 1.2% drop in prices for light trucks, although that probably doesn't translate into money in your pocket or mine. Bottom line, PPI was in keeping with expectations. The reports let the Fed continue to characterize inflation as "subdued" and keep rates low. As with housing, there was little market reaction to today's report.
Something to tell your grandchildren. In a move Wednesday that would have been heartily endorsed in the Bizarro World ("Us do opposite of all earthly things!") (Oh, don't tell me you never read Superman comics), shareholders of Berkshire Hathaway (BRKA) approved a stock split covering Class B Berkshire shares (BRKB). Effective Thursday morning, the 50-for-1 split will cut the price of these shares to around $69 each, from Wednesday's $3,479. At last, "normal" investors will be able to bet on famed investor Warren Buffett's company without taking out a second mortgage.
Seriously, the move, which was approved last year by Berkshire's board, could attract new investors by eliminating Class A sticker shock. It could also pave the way for Berkshire to join the S&P 500 since it would increase the number of shares outstanding, as those i charge of maintaining the S&P 500 have wisely been wary of adding stocks with low liquidity. Berkshire asked shareholders to approve the split so it could offer Berkshire shares to all investors in Burlington Northern Railway Company. Berkshire agreed in November to acquire Burlington in a deal valued at $34 billion in cash and stock, scheduled to close soon. Note that class B shares carry reduced voting rights and can't be converted into Class A shares. Class A shares closed Wednesday at $104,500, not a typo, up $4,470 or 4.47%; class B's finished at $3479. I predict they will sell exactly like hotcakes:
BERKSHIRE HATHAWAY, CLASS B, to split 50-to-1 Thursday
Thursday comes the Petroleum status report from the EIA, one day late due to Monday's holiday, and that other potential market mover, jobless claims, along with the EIA natural gas report, leading indicators, and the Philadelphia Fed Survey. All eyes will be on earnings from Google (GOOG), Burlington Northern (BNI) and Goldman Sachs (GS); most eyes will be on AmEx (AXP), Conexant (CNX), Comerica (CMA), ConEd (ED), Capitol One Financial (COF), Continental Airlines (CAL), Cubist Pharmaceuticals (CBST), XX Fifth Third Bancorp (FITB), Icici Bank (IBN), Imation (IMN), Freeport-McMoran (FCX), International Game Tech (IGT), Precision Castparts (PCS), PNC Financial (PNC), PPG Industries (PPG), Southwest Airlines (LUV), United Health (UNH) and Xerox (XRX), among others.