We had another good day on Wall Street thanks to a better than expected home sales number and positive news regarding Ambac and MBIA. At 9am, the markets got a boost because the existing home sales number came in at 4.89M when the market was looking for 4.80M (numbers declined less than expected). “Sales of existing homes fell to the lowest level in nearly a decade in January while the median price for a home dropped for the fifth straight month” (Source: CNBC.com). Even though this wasn’t the best news, everyone on CNBC TV was talking about a potential bottom in the housing market because there are signs of price stabilization. I’m not buying this “hope” that this is the beginning of a bottom. There’s still a lot of room to go lower and I don’t expect things to begin looking better until at least the end of this year. Here’s an in-depth Bloomberg.com article describing the housing market.
The markets traded modestly higher for most of the afternoon until news broke at 1:30 pm regarding the financial health of Ambac and MBIA. S&P affirmed MBIA’s AAA credit rating and removed it from its negative watch list. S&P also affirmed Ambac’s AAA credit rating, but the company remained on the negative watch list because of uncertainty involved with their recapitalization plan (Source: CNBC TV, Bloomberg.com). Stock prices jumped immediately when this news broke, most likely people were covering their short positions (bets that stock prices will decline), and the major indices finished the day up over 1%. The financial stocks also rallied on this news. Remember, these two bond insurers protect over $1T worth of securities and now that they have maintained their AAA rating, banks will not have to write-down assets on their balance sheet in order to reflect the true value of their securities.
In other news, Visa announced they will sell $406M shares between $37 and $42 (totaling more than $17B = the biggest initial public offering). The world is moving from paper to plastic (cash to credit cards) and this extra cash will allow Visa to better meet its customers’ needs (Source: Bloomberg.com). Shares of MasterCard, Visa’s biggest competitor, were down big on the day.
In earnings news, Lowe’s reported a 33% decline in Q4 earnings and gave guidance of $1.50-1.58, well below analysts’ estimates of $1.73. Surprisingly, the stock was beaten up that badly. This report is just another sign that the housing market is bad, but most of the bad news was already priced in the stock (Source CNBC TV).
In the financial sector, Goldman Sachs downgraded Freddie Mac and Fannie Mae because of “potential credit losses…stemming from a 'severe' housing market.” Goldman also downgraded Washington Mutual. According to Bloomberg.com, “Citibank may post a loss of $1.6 billion, or 28 cents a share, for the first quarter, compared with a profit of about $5 billion, or $1.01, a year earlier…shares may fall below $16 as Citigroup is forced to sell $100 billion of assets.” Here are two great articles discussing the Goldman downgrades: Marketwatch.com and CNBC.com.
Take-Two (software game designer of Grand Theft Auto) was up 55% on the day after Electronic Arts announced a $2B take-over bid. “Take-Two rejected a cash offer of $26 a share on Feb. 22, prompting Electronic Arts to take its bid directly to investors. The offer is 64 percent higher than the Feb. 15 closing price, the last day of trading before the announcement was made” (Source Bloomberg.com).
Today’s rally was broad-based, meaning almost every sector was positive. Energy stocks were strong as oil was up, and biotech stocks were also strong thanks to the good news from Genentech the other day. Bond yields continue to move higher (prices going down) and are way off their lows from the beginning of this month. Bonds led the market lower the second half of ’07 and if this upward trend continues, I expect stocks to follow.
Tomorrow’s tone will be set before the market opens when the PPI and Consumer Confidence numbers are released. Foster Wheeler, Home Depot, Macy’s, and Target report earnings tomorrow.
DJIA 12,570.22 +189.20 (+1.53%)
Nasdaq 2,327.48 +24.13 (+1.05%)
S&P 500 1,371.80 +18.69 (+1.38%)
NYSE Volume 3,772,926,000
2-Yr Bond 2.12% +0.10
10-Yr Bond 3.90% +0.10
30-Yr Bond 4.66% +0.09
Crude Oil 99.41 +0.50
Gold 940.25 -4.35
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