A Week in the Rearview – 4/24/09
In the headlines
A look at some of the market movers over the past week:
- GlaxoSmithKline agreed to buy Stiefel Labs for $3.6 billion
- Pepsico offered $6 billion to buy out its two largest bottlers
- American Sterling Bank joined this year’s tally of failed banks
- The government will make additional funds available to Chrysler and General Motors
- A government watchdog issued a warning about potential abuses of the proposed PPIP plan
- Oracle agreed to buy Sun Microsystems for $7.4 billion, an acquisition that IBM had attempted earlier in the month
- Bank of America reported better than expected earnings
- Separately, Bank of America’s CEO Ken Lewis said the government urged silence on the deteriorating situation at Merrill Lynch
- Treasury Secretary Tim Geithner said most of the largest US banks have enough cash to weather the downturn
- Despite being angry at the bank’s turmoil, Citigroup shareholders re-elected every one of the company’s directors
- The situation at General Motors continues to get more dire
- Despite worse-than-expected quarterly results, Morgan Stanley is considering repaying TARP money
- Sales of its iPhone helped Apple post better than expected first quarter profits
- Freddie Mac’s acting CFO took his own life
- Amazon.com reported a hefty jump in quarterly profit
Commentary
For the S&P 500 index, the streak is over. After six straight weeks of gains, the S&P index finished the week with a 0.4% loss on a volatile week of action. A big 4.3% drop on Monday accounted for most of the week’s loss and strong sessions on Tuesday, Thursday, and Friday couldn’t quite make up enough ground to end the week in the black.
It was financials and earnings that were in focus for the week, with the two largely tugging the major indices in opposite directions. After a torrid period following the early March lows, which stemmed in part from some better than expected earnings announcements, financials struggled during the week.
On Monday, Bank of America reported earnings above expectations, but worried the market with mounting provisions for credit losses. The bank also made it no secret that it expects credit to continue to be an issue for some time to come. Morgan Stanley, meanwhile, posted a loss that was larger than anticipated, reversing the trend that competitors like Goldman Sachs fed in the prior week.
The issue of banking stress tests also continues to provide question marks for those watching the financial sector. Though the government has made some announcements about the stress tests that could be regarded as bullish, there is still a significant level of opacity surrounding the performance of individual banks, as well as how “stressful” the tests actually were. At the same time, the earlier intervention efforts of the Federal Reserve and Treasury were called into question as Bank of America’s CEO testified that officials from the government urged the bank to keep quiet about the troubles at Merrill Lynch.
Earnings announcements from other sectors of the economy helped to provide a counterbalance to the renewed fear in the financial sector. While it’s important to note that earnings by and large were not positive on an absolute basis — on average the 143 S&P components that reported saw earnings per share fall 40% — the majority of reports came in above Wall Street’s expectations. This helped investors get more confident about the idea that while the recession likely isn’t over, the economy may be starting to stabilize.
Looking ahead
Earnings will once again be a major focus for the week. In the financial sector, Deutsche Bank will be the only major banking release and is unlikely to have much impact on its own. There will be a number of major insurance companies that will report next week though, and they could make some waves. As some of the largest buyers of fixed income securities, insurance companies will not only be a good read on how fixed income and structured securities are performing, but their financial performance and ability to be a large buyer in that market will be an important factor for the credit markets.
Outside of finance we will see a large cross-section of industries reporting. Technology and retail will be two sectors that the market is likely to take particular note of. Technology is typically considered to be a leader when the economy is recovering, so investors will look to spending on technology as a tell on a potential turn in the economy. Retail, meanwhile, will be watched for signs that US consumers are getting more confident — or at least less fearful — and are starting to spend again.
Economic reports will be less likely to fade into the background this week as we will have a couple reports that have the potential to move the market. On Wednesday we’ll get an initial reading on first quarter GDP. Though this is backward looking, it will be watched to make sure that deterioration during the quarter wasn’t worse than what was widely believed.
The following day, the Federal Reserve will announce its decision on the Federal Funds Rate. There seems little debate as to what the Fed’s actual rate decision will be — according to data collected by the Federal Reserve Bank of Cleveland, the market puts nearly a 100% probability of the Fed keeping its target at 0%-0.25% for the April meeting and a 90%-plus probability of the same outcome at the June meeting. What will be important, however, is the commentary that the Fed provides with its decision and what that signals about the state of the economy.
The upcoming week will be an interesting one as the momentum behind the recent rally seems to be waning. Thus far, first quarter earnings reports appear bad, but not as bad as the market may have expected. Indications on the financial sector have also been troublesome, but not as dire as some experts have suggested. The question that the market faces next week is whether the recent rally has already adjusted for the better than expected earnings, or whether further recovery is warranted.
