If Financials Fall, Will Markets Follow?
by Sam Collins 04/15/08
Yesterday, the focus switched from one big earnings miss in General Electric (GE) to another in Wachovia Corp. (WB).
Wachovia (WB) reported a Q1 loss of 14 cents a share versus analysts' expectations of a 40-cent profit. The firm also cut its dividend to 37.5 cents from 64 cents, preserving about $2 billion of capital annually.
The problems at Wachovia stem from the $25 million purchase of Golden West Financial two years ago and its concentration in California, a state that has been hard-hit by the housing market's problems.
But losses for the broader market could have been worse, since selling was somewhat offset by strength in the energy sector and a Commerce Department report that showed retail sales in March rose 0.2%. The retail sales report, though, was not as good as it first appeared since much of the strength had to do with the rise in the price of gasoline. Once that was subtracted, the real gain was just 0.1%.
The close found the Dow Jones Industrial Average (DJI) off 23 points at 12,302. The S&P 500 (SPX) fell five points at 1,328, and the Nasdaq (NASD) was off 14 points at 2,276.
The New York Stock Exchange traded just under 1.2 billion shares and at the Nasdaq (NASD) only 691 million shares were exchanged. Decliners exceeded advancers on both exchanges by about 3-to-2.
May crude oil futures gained $1.62, closing at $111.76 a barrel, and the Amex Energy SPDR (XLE) closed at $79.28, up $1.78. June gold prices gained $1.70 to $928.70 per troy ounce, mostly as a result of a weaker dollar, and the PHLX Gold/Silver Index (XAU) squeezed out a gain of 49 cents, closing at $182.18.
What the Markets Are Saying
The U.S. stock markets were again dominated by selling in the financial sector. This sector makes up a large portion of stocks on the S&P 500 (SPX), and of the 30 companies in the Dow Jones Industrials (DJI), many have large divisions devoted to the capital markets. It is no surprise, then, that the major averages were down as a result of Wachovia's (WB) earnings shortfall.
One of the most widely followed financial Exchange-Traded Funds (ETF) is the Financial Select Sector SPDR (XLF). This fund is comprised of banks, diversified financial stocks, insurance firms and real estate companies.
Since the news of the subprime crisis first hit around the middle of 2007, the XLF has fallen more than 36%. But it appears that on March 17, when the XLF fell more than three points in two days to a new low at $22.29, a selling climax may have occurred. Click here to read more of my thoughts on the Financial Select Sector SPDR (XLF) in our Trade of the Day.
Yesterday, however, the XLF fell another 59 cents on the Wachovia (WB) shortfall. With many members of the fund reporting earnings this week, some no doubt writing off as many problems as they can, this could heavily impact the S&P 500 (SPX) and could also tell us whether the major indices will hold at current levels or head lower.
Today's Trading Landscape
Earnings to be reported today include Adtran (ADTN), Badger Meter (BMI), Blue Holdings (BLUE), Bok Financial (BOKF), Champion Enterprises (CHB), CPI Corp. (CPY), CSX Corp. (CSX), East West Bancorp (EWBC), Enterprise Financial Services Corp. (EFSC), First Mariner Bancorp (FMAR), Forest Laboratories (FRX), Gander Mountain Co. (GMTN), Insteel Industries (IIIN), Intel (INTC), Johnson & Johnson (JNJ), Linear Technology (LLTC), M&T Bank (MTB), Marshall & Ilsley (MI), MedAvant Healthcare Solutions (PILL), Northern Trust (NTRS), Polaris Industries (PII), Regions Financial Corp. (RF), Renaissance Learning (RLRN), Renasant Corp. (RNST), Seagate Technology (STX), Source Interlink Companies (SORC), State Street Corp. (STT), U.S. Bancorp (USB), Verso Technologies (VRSO), Washington Mutual (WM) and WestAmerica Bancorp (WABC).
The following economic reports are due today: International Council of Shopping Centers (ICSC) Chain Store Sales Index, March Producer Price Index (the consensus expects a 0.5% gain; ex-food and energy, the consensus expects a 0.2% gain), April N.Y. Fed Manufacturing Index (the consensus expects negative 17.5), Redbook Retail Sales Index for April 12, the February Treasury International Capital Flows and the April National Association of Home Builders' (NAHB) Housing Market Index.
The big news today is the merger of Delta (DAL) and Northwest (NWA), along with talk of a possible merger of Continental (CAL) and UAL Corp. (UAL), United Airlines' holding firm.
However, investors will be focusing on the earnings of Intel (INTC), Johnson & Johnson (JNJ), and especially U.S. Bancorp (USB), Washington Mutual (WM) and others with exposure to financial risks.
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