We found out Tuesday before the opening bell that the problems banks have been facing were not as bad or wide-spread as everyone had thought, and what a relief this was to Wall Street. Thanks to better-than-expected earnings reports from Goldman Sachs and Lehman Brothers, the markets opened higher about 2% and continued their upward trend to the day’s close.
Shares of Goldman Sachs (GS) rose 16% after “income fell to $1.51B, or $3.23 a share…from $3.2B, or $6.67, a year earlier. The average estimate of 17 analysts surveyed by Bloomberg was for $2.59 a share, with forecasts ranging from $1.95 to $3.40.” Many investors were concerned Goldman would have similar capital or liquidity problems like Bear Stearns, but Goldman’s CEO said the company’s “liquidity position is stronger than it’s ever been.” Goldman took a $1B write-down on some of their bad loans, much less than some people were expecting (Source: Bloomberg.com).
Shares of Lehman Brothers (LEH) soared 46% after the company posted much better-than-expected earnings. Many investors were expecting problems similar to those at Bear Stearns, but that uncertainty was washed away after the company’s strong earnings report. Q1 net income declined 57% to $489M, or $0.81 per share – most analysts were looking for about 72 cents. LEH took a $1.8B write-down due to mortgage-related securities, and they also announced they would release 5,300 workers – 19% of the workforce (Source: Bloomberg.com).
This good news from these two companies pushed all the financials companies higher. A lot of the movement was due to short-covering as well since so many people were betting these companies had problems like Bear Stearns did. Shares of Fannie Mae were up 27%, Freddie Mac was up 26%, Countrywide Financial was up 25%, and Bear Stearns was up 23%.
In the afternoon, the Fed announced it lowered its Fed Funds target rate 75bp to 2.25%. Most people were expecting at least a 100bp cut and the markets subsequently sold off. However, stocks rebounding quickly and resumed their upward trend. The Dollar actually rebounded probably because the cut wasn’t as steep as anticipated. Here are some quotes from the Fed statement:
“Recent information indicates that the outlook for economic activity has weakened further.”
“Inflation has been elevated, and some indicators of inflation expectations have risen…It will be necessary to continue to monitor inflation developments carefully.”
“Downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.”
One interesting piece of information to note is that there were two Fed officials who opposed a 75bp cut. The Dallas Fed President and the Philadelphia Fed President were in favor of less aggressive easing. The Fed continues to do all it can to making lending easier for banks in an effort prevent a freeze in the credit markets.
On the economic front, housing starts for February came in better than expected, but they were still down slightly from last month. Building permits, however, were below expectations and well below last month’s reading. Homebuilder stocks rallied on the day. I’m not sure if it was because of this data or just because of the overall market rally. Also, February PPI data, a 0.3% increase, was in-line with expectations, but the Core PPI came in at a 0.5% increase when analysts were only expecting a 0.2% increase (Source: Bloomberg.com).
Today was another very bullish day for stocks, especially the depressed financial stocks. Tomorrow’s price action depends on Morgan Stanley’s earnings report and how badly the company was affected by sub-prime losses.
In other news…
- Yahoo gave a very positive outlook for the next three years and explained they wouldn’t accept less than $45B from Microsoft (Source: finance.yahoo.com, “Yahoo Sees Rosy Outlook for 2009, 2010)
- Morgan Stanley reports quarterly earnings tomorrow
- Shares of Visa (V) begin trading tomorrow: the stock is priced at $44, above the forecasted range (Source: CNBC.com)
DJIA 12,392.66 +420.41 (+3.51%)
Nasdaq 2,268.262177.01 +91.25 (+4.19%)
S&P 500 1,330.741,276.60 +54.14 (+4.24%)
NYSE Volume 5,506,911,000
2-Yr Bond 1.58% +0.23
10-Yr Bond 3.48% +0.14
30-Yr Bond 4.35% +0.06
Crude Oil (Apr) 109.42 +3.74
Nat Gas (Apr) 9.414 +0.314
Gold (Apr) 1004.30 +1.70
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