Friday, July 18, 2008

Relief Rally

It was a volatile week for the stock market accompanied by many large news stories. For starters the government has stepped up to back Freddie Mac (FRE) and Fannie May (FNM), the government sponsored entities that help supply liquidity to the mortgage market. The government also stepped in and took control of IndyMac Bank. Additionally, we saw several major financial institutions miss earnings estimates including Bank of New York Mellon (BK) which reported a profit of $.26/share when the street was expecting $.75/share, CIT Group (CIT) reported a $7.88/share loss compared to the $3.45/share loss the street was expecting, and Merrill Lynch (MER) which reported a loss of $4.95/share while expectations were for a loss of $1.91/share.

You would think with all of this negative news that the markets would have moved down in a big way but this was not the case. The Dow Jones Industrial Average gained 3.6% for the week, and the S&P 500 was up 1.7%. There were a couple of reasons for the gains. First, Oil dropped 11% on the week which hopefully will relieve some of the inflation pressers facing American consumers. Second, there were other banks that were able to beat earnings expectations. With all of the worry about the credit crunch, expectations for financial stocks were very low and there was fear on Wall Street. When some of the financial stocks reported their quarterly EPS were above estimates it triggered a large rebound in financial stocks. Here is a sample of the reporting financial institutions that beat average analysts estimates.

US Bancorp (USB) reported $.64/share vs. $.60/share expectations.
Wells Fargo (WFC) reported $.53/share vs. $.50/share expectations.
JP Morgan Chase (JPM) reported $.54/share vs. $.44/share expectations.
Citigroup (C) reported $-.49/share vs. $-.66/share expectations.

Wells Fargo also increased its dividend showing that management feels it has adequate capital to meet current and future requirements. It appears that all banks may not be going out of business as was worried. Expectations are still low and there may still be bank land mines out there but there was much relief in the market. I hope to look at some interesting financial ETFs this weekend. I hope you will come back to take a look with me.

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