I wonder what those financial advisers I blogged about last week are thinking today after reducing their clients percentage in stocks? They are missing out on this nice rally!
Short selling rose the most in 5 years last month. However the way the stock market is rolling now, you might see an article for this month saying long positions rose for the highest in 5 years.
Bank earnings preview for this week and next weeks earnings results: Financial market turmoil is expected to hurt third-quarter results
Here are the top financial stories of the day:
1) Rally Has Legs: Dow Up 330.06-From The Wall Street Journal
Stocks soared as investors put their faith in a resolution to Europe's debt crisis and the ability of U.S. companies to power through an uncertain economy.
The Dow Jones Industrial Average jumped 330.06 points, or almost 3%, to 11433.18, its biggest one-day surge in two months. The gains add to a powerful rally that began in the final hour of trading Tuesday last week and has pushed the Dow up more than 1000 points in less than five days.
Monday's gains came after German and French leaders said they were determined to present a "comprehensive package" by the end of October that would include a plan to recapitalize euro-zone banks as needed and address the Continent's debt crisis. Europe's stock markets soared. Germany's DAX index gained 3%, while France's CAC-40 popped 2.1%.
"Putting a time frame on it makes the plan seem more realistic and definitely puts their credibility on the line," said Paul Zemsky, head of asset allocation at ING Investment Management.
Still, the package outlined by the two leaders was sparse, suggesting Europe's two top economies have yet to agree on the plan's specific elements. And for investors who have been growing increasingly skeptical of European officials' ability to contain the crisis, the recent commitments rang hollow.
"I'd be leery of this move," said Charlie Smith, chief investment officer at Pittsburgh-based Fort Pitt Capital Group. "I don't think there are a lot of strong underpinnings to this rally."
One sign Monday's rally lacked strength: Volume was particularly low as holidays were being observed in the U.S., Canada and Japan. (Bond markets in the U.S. also were closed.) Some 3.9 billion shares changed hands in New York Stock Exchange composite volume, below the daily average of 4.4 billion shares this year and the lowest in three weeks.
Traders have noted that many of the big gains have been on days of lighter volume, suggesting less conviction on the part of investors.
The recent rally has sparked debate among both stock-chart watchers and fundamentals analysts about whether stocks may finally be breaking out of their so-called trading range. The Dow has been bouncing roughly between 10500 and 11500 for the past two months.
Some technical analysts believe the Dow's surge last week was a sign stocks had hit bottom, for this period at least. Others point to the tough macroeconomic outlook—the U.S. economy is still struggling, and many issues remain unresolved in Europe.
"When pessimism gets very extreme, you get these sorts of relief rallies, but until you resolve some of the fundamental issues, it's hard to get a runaway rally," said Vadim Zlotnikov, chief market strategist at AllianceBernstein. "I wouldn't call this a true inflection point."
The volatility has also alarmed investors, keeping many at bay. Monday's move, for example, was the 10th time in the past 11 trading sessions that the Dow moved by more than 100 points.
Many investors are now looking to the coming earnings season for clues. Alcoa is the first Dow component to report third-quarter earnings, on Tuesday.
In a reflection of growing cautiousness, company analysts have reined in their expectations for corporate profits in the quarter, and in the past week alone have brought them down by a further 6.2% for the Standard & Poor's 500 companies, according to S&P Capital IQ.
But some investors say they think companies can defy the economic weakness, especially since relatively few companies have issued negative prereleases—effectively, warnings that earnings may be weaker than forecast.
"A lot of us were bracing for a worse prerelease season than we've actually seen," Mr. Zlotnikov said.
Monday's gains were concentrated among some of the stocks that were most battered during the summer, with the beleaguered financial sector surging higher, led by Morgan Stanley, up $1.05, or 7.4%, to $15.29, and Bank of America, which added 38 cents, or 6.4%, to 6.28. Energy, materials and industrial stocks were close behind.
The euro, which has tumbled amid the European concerns, rose 2% to $1.3644.
The falling greenback lit a fire under dollar-priced commodities.
Gold rose 2.2%, silver soared 3.2%, and copper—a key industrial metal linked to the economy—rose 2.9%. Crude oil, meanwhile, also rose 2.9%, capping a four-day rally that had seen oil rise by almost $10 a barrel.
In corporate news, Netflix said it will drop its plan to split its movie-streaming business and DVD-by-mail service into two separate websites, a move that had sparked an outcry among subscribers and sent its stock sharply lower. Shares dropped 5.59, or 4.8%, to 111.62, after earlier rising nearly 10%.
Apple rose 19.01, or 5.1%, to 388.81. Preorders for the iPhone 4S topped one million in a single day, surpassing the previous single-day preorder record of 600,000 set by the iPhone 4. AT&T gained 73 cents, or 2.6%, to 29.17, after the company said it had seen "extraordinary" demand for Apple's new device.
Sprint Nextel dropped 19 cents, or 7.9%, to 2.22, after falling 20% on Friday, as analysts expressed concern over the carrier's plans to roll out its own fourth-generation wireless network.
Yahoo rose 37 cents, or 2.4%, to 15.84, after Reuters reported co-founder and former Chief Executive Jerry Yang is considering a deal to take the Internet company private.
Complete Production Services ran up 8.04, or 39%, to 28.42, after the energy-services company agreed to be acquired by Superior Energy Services in a cash-and-stock deal. Superior Energy shed 3.78, or 14%, to 23.63.
2) Short Selling Rises Most Since 2006-From Bloomberg
Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities.
Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006, according to information compiled for Bloomberg by Data Explorers, a London-based research firm. Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show.
Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market. Bulls say declines have gone too far, with the MSCI All-Country World Index’s valuation at about half the 16-year average, just above the level three years ago, following the collapse of Lehman Brothers Holdings Inc. Losses since May exceed the combined gross domestic product of Brazil, Russia, India and China, data compiled by Bloomberg show.
“The Lehman collapse is way too clear in people’s minds,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “They don’t want to get burned as much again. They know either they get some protection or get out altogether.”
The MSCI All-Country World was little changed at 285.57 at 2:04 p.m. Hong Kong time. Stocks rose last week, sending the global index up 1.8 percent, after efforts by Europe’s policy makers to contain the region’s debt crisis. The gauge of 45 emerging and developed countries sank 18 percent in the third quarter, the biggest drop since the bankruptcy of New York-based Lehman froze credit markets and ultimately pushed the Standard & Poor’s 500 Index to a 12-year low.
Yield Curve
U.S. Federal Reserve Chairman Ben S. Bernanke said last week that the central bank can take steps to sustain a recovery that’s “close to faltering.” Employers added 103,000 workers to payrolls in September and the unemployment rate held at 9.1 percent, the Washington-based Labor Department said Oct. 7.
The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.
Biggest Increases
Alcoa Inc. (AA), the largest U.S. aluminum producer, is the most shorted stock in the Dow Jones Industrial Average with bearish bets making up 4.4 percent of the New York-based company’s shares available for trading, according to Data Explorers. Pfizer Inc. (PFE) and General Electric Co. (GE) had the biggest increases in short interest last month among companies listed on the New York Stock Exchange.
Short selling, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman’s collapse. The measure’s average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show.
European stocks fell the most last quarter among the world’s biggest equity markets, with the DAX Index of German shares and France’s CAC-40 Index each losing 25 percent. Finance leaders have clashed over how to prevent Greece from defaulting on its debt, spurring concern that losses may engulf banks in France and Italy.
‘Everything Necessary’
Angela Merkel and Nicolas Sarkozy gave themselves three weeks yesterday to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance. Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.
Dexia SA (DEXB) plunged 42 percent last week as the French and Belgian governments organized plans to break up the lender after its short-term funding evaporated. Plans to inject capital into Europe’s banks are “well under way,” European Commission President Jose Barroso said last week.
“The downside risk if the euro-zone cracks is so huge that the market could go anywhere,” said Francis
Eliot, a strategist at Mansard Capital LLP, whose Mansard Macro Fund returned 3.9 percent last month as the MSCI All-Country World Index tumbled 9.7 percent. “The short trade is a bit crowded, but the risk is downward.”
Stock Valuations
Equity valuations are already pricing in a recession and stocks are unlikely to fall much below the lowest levels of last week, according to Binky Chadha, the New York-based chief U.S. equity strategist at Deutsche Bank AG.
“Valuations and short interest are approaching Lehman levels,” Chadha said in a telephone interview on Oct. 6. “It’s not very easy to continue to take larger and larger short positions.”
Companies in the benchmark gauge for American equities trade at 10.4 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg. At the same time, analysts have cut projections for profits next year to $111.46 a share, the data show.
Short sales in New York-based Pfizer, the world’s biggest drugmaker, rose 22 percent to 111 million shares in the first two weeks of September, exchange data show. That’s 2.51 times the average trading volume from the past 30 days. The S&P 500’s short interest ratio is 3.19, data compiled by Bloomberg show.
GE, Strategists
Bets on losses in GE, which makes wind turbines and jet engines, climbed 13 percent to 141 million shares between Aug. 31 and Sept. 15, the most since August 2009. Short interest on the Fairfield, Connecticut-based company has more than doubled in 2011 as the stock slumped 15 percent.
Wall Street strategists say the S&P 500, after falling within 1 percent of a bear market last week, will post the biggest fourth-quarter rally in 13 years. The measure will climb 13 percent to end 2011 at 1,300, according to the average estimate of 12 strategists surveyed by Bloomberg.
About 4.1 percent of NYSE shares have been borrowed and sold, up from 3.5 percent at the end of July, data from the bourse shows. U.S. short sales are rising at the second-fastest pace on record after the 2008 financial crisis, according to exchange data dating back to 1995.
March 2009
Bearish bets last increased faster in March 2009, the same month the S&P 500 began a bull market that doubled its value. The surge in equity prices came seven months after NYSE short interest climbed to an all-time high in July 2008. The U.S. equity benchmark rose 2.1 percent to 1,155.46 last week.
“We have more shorts on today than we had six months ago,” said Chris Baggini, a fund manager at Berwyn, Pennsylvania-based Turner Investment Partners Inc., which oversees about $18 billion. “We’re finding more short ideas in the U.S. market that we think we can make money on in an environment that’s slower than it was six months ago.”
Baggini, who spoke in an Oct. 6 telephone interview, helps oversee the Turner Spectrum Fund that climbed 5.9 percent in the 12-months ended Oct. 6. The S&P 500 fell 0.2 percent in that period.
Bets that Hong Kong stocks will fall have risen to the highest level since January 2008 amid falling home sales in China and concern that the world’s second-largest economy is slowing. Wagers on declines reached HK$m12.8 billion ($1.6 billion) on Sept. 30, Hong Kong exchange data show. That’s 14 percent of the total value traded on the city’s stock market, the most since 1999.
Foreign Investors
The MSCI China (MXCN) Index of 148 stocks available to foreign investors has fallen 26 percent since Aug. 1. China’s home prices fell 0.03 percent from a month earlier in September, the first decline in a year, said Soufun Holdings Ltd., the country’s biggest real estate website owner. The central bank has raised interest rates five times in the past 12 months.
Alex Au, who helps oversee $300 million as managing director of Richland Capital Management Ltd. in Hong Kong, said he’s “aggressively” shorting cement stocks on speculation spending on roads and factories will weaken. Anhui-based Anhui Conch Cement Co., China’s largest producer, has lost 47 percent since its July 14 peak. The Richland Asia Absolute Return Fund rose 3 percent this year through Sept. 30, versus the MSCI Asia Pacific Index’s 18 percent drop.
‘Yet to Come’
“The worst is yet to come,” Au said in an Oct. 4 phone interview. “If you look at the fundamentals, you’ll see that a lot of stocks are very cheap and you’ll be tempted to bottom pick, but this is very dangerous.”
Average short interest in Europe as a percentage of shares outstanding has climbed to 2.8 percent, the highest since June, from 2.6 percent at the beginning of September, according to Data Explorers. Regulators in Italy, Spain, France and Belgium banned new short sales on 66 financial firms on Aug. 11, when the Euro Stoxx Banks Index had plunged 33 percent this year.
Filippo Garbarino, who oversees $50 million as manager at Frontwave Capital Ltd. in Chiasso, Switzerland, said he has bet against shares of financial and publishing companies.
“The market is so undervalued right now it’s kind of hard to take a short position,” Garbarino said. “But at the same time given the economy, it is hard to be long.”
3) Bank earnings to reflect slowdown from 3Q turmoil-From the AP
Investors are bracing for a rough earnings season from banks.
Turbulence in stock and bond markets, combined with waning confidence among business and consumers, hurt banks' business in the third quarter. IPOs were shelved, companies postponed plans to sell bonds, and acquisitions were put on ice. Consumers also held back on spending.
The sharp drop in business activity hurt banks, which rely on borrowing by companies and consumers to make money. Most Wall Street analysts lowered their earnings estimates for large U.S. banks.
JPMorgan Chase & Co. will be the first major bank to report results Thursday, followed by Citigroup, Wells Fargo, Bank of America and Goldman Sachs the week after.
The intense global market turmoil during the third quarter has already taken a toll on bank stocks. The KBW index of leading banks plunged 27 percent during the third quarter.
Howard Chen, an analyst at Credit Suisse, estimates that mergers and acquisitions volume in the third quarter plummeted 34 percent from the prior quarter, while stock underwriting sank 54 percent.
Chen said it was the weakest quarter for total debt issuance since the financial crisis. Overall debt and loan underwriting volume fell 27 percent from the previous quarter, leading to a 35 percent decrease in fees.
Worries about Europe's debt problems continued to hang over U.S. banks in the third quarter. Investors expect bank executives to offer more clarification on how exposed the banks are to the crisis when the banks host conference calls to discuss their earnings.
Most large banks have disclosed the amount of European debt they own, but it's unclear how much exposure they have via more complex derivatives trades they conduct with their counterparts in Europe. For example, U.S. banks sell financial contracts that act as insurance to protect against defaults on riskier European bonds.
Growth in U.S. business loans is expected to be a bright spot. According to the Federal Reserve, corporate borrowing grew rapidly during the third quarter. At the 25 largest banks by assets, commercial and industrial loans grew 15 percent, the Fed reported.
Here are the consensus earnings forecasts and highlights for each of the large U.S. banks from analysts surveyed by FactSet:
-- JPMorgan Chase & Co. reports Thursday. It is expected to earn 96 cents per share on revenue of $23.6 billion. Considered one of the strongest and most stable among the large banks, analysts expect JPMorgan to grab market share from competitors. However, it might be forced to once again to put aside more reserves to offset costs from increased litigation and repurchasing poorly written mortgage loans.
-- Citigroup Inc. reports on Monday, Oct. 17. The New York bank is expected to report earnings of 84 cents per share on revenue of $19.3 billion. Barclays Capital analyst Jason Goldberg reduced his estimates by 11 cents because of weakness in investment banking and the increasingly uncertain global economy.
-- Wells Fargo & Co. also reports Monday. The San Francisco bank is expected to earn 72 cents a share on revenue of $20.2 billion. Wells has one of the largest mortgage origination businesses of all banks and will likely have benefited from lower mortgage rates. Rates on 30-year mortgages hit a historic low of 4.08 percent in the third quarter.
-- Bank of America Corp. reports Tuesday, Oct. 18. Analysts expect the Charlotte, N.C. bank to report earnings of 26 cents per share on revenue of $25.8 billion. The bank has been battling lawsuits related to mortgages. It paid out $12.7 billion to settle claims in the first half of the year. Its Merrill Lynch investment banking and brokerage division helped lift earnings in the first half of 2011, but Merrill is unlikely not be of much help this quarter because of low trading volumes.
-- Goldman Sachs Group Inc. also releases results Tuesday. It is expected to earn 23 cents per share on revenue of $5.3 billion. Chen, of Credit Suisse, is more negative than other analysts on the New York bank.
Chen wrote in a report that the difficult market conditions and low appetite for risk among investment banking and trading clients could lead to a third quarter loss of 70 cents a share. If that happens, Chen notes that it would be only the second quarterly loss for Goldman since the bank went public in 1999.
-- Morgan Stanley will report on Wednesday, Oct. 19. Analysts estimate it will earn 31 cents per share on revenue of $7.5 billion. A sharp downturn in the investment advisory business is expected to hurt Morgan Stanley. Wells Fargo analyst Matthew Burnell lowered his earnings estimate to 26 cents from 56 cents per share because of weakness in trading. Executives are expected to shed more light on the bank's exposure to European debt and derivatives during their conference call. Worries about Europe have spooked Morgan Stanley investors lately, helping send the stock down 44 percent this year.
Quote of the Day from Dave Ramsey.com:
All of us are anxious to improve our circumstances, but are unwilling to improve ourselves. — James Allen
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