Market Summary: Fri. Feb. 22, 2008

Friday was supposed to be a very quiet day for economic and earnings news, but that was not the case. There was a very negative feel in the markets on Thursday afternoon and I expected that to continue into Friday morning, which it did. Stocks opened slightly higher after news that November’s and December’s Producer Price Index (PPI) were revised lower (Nov: +2.6% from +3.2%; Dec: -0.3% from -0.1%). Bonds also rallied on this news. Even with this good economic news, stocks continued their decline. The Dow remained down about 100 points all afternoon. The Nasdaq was the relative laggard because Intuit gave guidance that was below analysts’ expectations. INTU was down over 9% on the day. Other big tech names were also dragging the Nasdaq down, including Apple, Microsoft, IBM, and EMC.

Many of the big financial names were also weak. Freddie Mac and Fannie Mae were downgraded to “sell” by Merrill Lynch because of “weakening macro-economic financial market and credit trends.”

Goldman Sachs, Lehman Brothers, and Bear Sterns had Q1 estimates cut 40% by Sanford C. Bernstein. The analyst said “Market conditions remained challenging through February as troubles spread through a variety of areas within the fixed income market.”

The analyst cut profit estimates at Goldman Sachs by 45% to $3.03, at Morgan Stanley by 12% to $1.49, at Bear Stearns by 41% to $1.59, and at Lehman by 42% to $1.15 (Source: Bloomberg.com).

An analyst at Oppenheimer said Citigroup “will need to raise more capital and may cut its dividend again” (Source: Briefing.com).

MBIA was also in the news today. There was talk on CNBC that a downgrade may be coming for MBIA sometime next week. If they get downgraded, there will be no way they could compete with Buffet (and other AAA bond insurers) in the municipal bond business. Moody’s also downgraded Channel Reinsurance Ltd., a re-insurer that supports MBIA. The downgrade took place because “Channel Re’s capital position has been weakened by its exposure to the U.S. residential mortgage market…and their weakened credit profile could negatively impact the value proposition of its reinsurance relationship with its sole customer, MBIA” (Source: Marrketwatch.com).

Getting away from financials, the treasury market sold-off around noon after a speech by Federal Reserve Bank of Dallas President Richard Fisher. He said the U.S. will avert a “prolonged period of negative economic growth.” Fisher was the only Fed official to vote against the interest rate cuts at their last meeting Jan. 30. He also referenced increasing inflation worries that may prevent the Fed from further cutting rates. He said the recent inflation data was “not encouraging” and he has “heard more concern about inflation than in the past” (Source: Bloomberg.com).

Going into the close, the markets looked very bad for Monday’s open. However, everything changed at about 2:30 when Charlie Gasparino, CNBC’s financial on-air editor, reported that plans for an Ambac bail out were underway and as early as Monday or Tuesday something would be announced. This news sparked at 230 point reversal in the Dow. Gasparino said bankers have made “significant progress” in their recapitalization plan to preserve Ambac’s AAA rating. The banks involved are Citi, Wachovia, UBS, Royal Bank of Scotland, Barclays, BNP Paribas, Dresdner Bank, and Societe Generale. According to Bloomberg.com, Ambac may receive $3B in new capital. The preservation of Ambac’s AAA rating (as well as MBIA’s and FGIC’s AAA rating) would save banks $70B in additional write-downs. The bond insurers back over $2.4T in securities. There is also talk of splitting the municipal bond business from the CDO business.

Because of this news, the financial stocks rallied in the last 30 minutes and the major indices all closed in positive territory. There is now a very optimistic outlook for the beginning of next week assuming some sort of bail out plan for Ambac is conceived. Look for a higher open Monday morning, especially in the financials.

I expect next week to be very volatile with high volume as lots of inflation data is reported.

Here’s a Bloomberg.com market summary for Friday.

Here’s a Briefing.com weekly market wrap up. It’s a pretty good summary of what happened this week.

Some other news…..

Nissan’s CEO said the U.S. auto market is currently in a recession and car-makers are facing difficulties due to higher raw costs (Source: finance.yahoo.com).

“Traders place 100 percent odds that the Fed will cut the benchmark rate by at least half a point by the end of the next meeting on March 18, futures prices show” (Source: Bloomberg.com).

Standard & Poor’s cut GMAC’s credit rating to B+ and Residential Capital’s rating to B. According to CNBC.com, “Both companies face difficult funding environments.”

According to Bloomberg.com, Genentech (DNA) won FDA approval on its drug Avastin for breast cancer treatment. The stock is up 8% in after hours trading.

DJIA 12,381.02 +96.72 (+0.79%)
Nasdaq 2,303.35 +3.57 (+0.16%)
S&P 500 1,353.11 +10.58 (+0.79%)
NYSE Volume 3,560,735,000

2-Yr Bond 2.02% +0.05
10-Yr Bond 3.80% +0.03
30-Yr Bond 4.57% +0.04

Dollar Index 75.52 -0.08
Crude Oil 98.91 +0.52
Gold 944.60 -1.11