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Global Financial Crisis Catalysts Stock Prices Triple this Month

Companies / Credit Crisis 2009 Aug 31, 2009 - 01:20 PM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleWilliam Patalon III writes: Three of the financial institutions that were key catalysts to the global financial crisis and that owe the federal government billions of dollars as a direct result of those problems have seen their shares triple in price so far this month.


Profit from the "Biggest Economic Shift in 100 Years"

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative short squeeze that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE: AIG) have soared from $13.14 to $50.23, as of Fridays close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains, MarketWatch.com reported. Fannies shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddies shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares theyd sold short, traders told MarketWatch. AIG has 21% of its float shares available to the public sold short, the sixth-highest proportion in the Standard & Poors 500 Index, according to Bloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

"Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters," Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?

Trading in financial-services stocks has dominated the stock-market volume this month. So-called day traders have gravitated to once-questionable financial stocks and helped fuel those stunning gains and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market's slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter after having posted six straight quarters in the red. It engineered a so-called reverse stock split, in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and cover their bets.

Despite the torrid run that AIGs shares have been on, the insurance companys bonds still trade at levels indicating the companys shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

The value of the company is still the same, Boockvar said. AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.

AIGs $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurers $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poors 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as Cash for Clunkers ended with a last-minute flurry of activity. Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.

While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC) reported that 416 institutions were on its problem list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and Lehman Brothers Holdings Inc. (OTC: LEHMQ) failures. Regulators are investigating its weekly trading huddles, where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode. Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner. In fact, natural gas plunged to a seven-year low.

Market/ Index

Year Close (2008)

Qtr Close (06/30/09)

Previous Week (08/21/09)

Current Week (08/28/09)

YTD Change

Dow Jones Industrial

8,776.39

8,447.00

9,505.96

9,544.20

+8.75%

NASDAQ

1,577.03

1,835.04

2,020.90

2,028.77

+28.64%

S&P 500

903.25

919.32

1,026.13

1,028.93

+13.91%

Russell 2000

499.45

508.28

581.51

579.86

+16.10%

Global Dow

1526.21

1,629.31

1,819.50

1,841.91

+20.69%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

2.24%

3.52%

3.567%

3.45%

+121 bps

Economically Speaking

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called jobless recovery when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation. For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing. New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006. Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the Cash for Clunkers program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed. Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward. Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months. Personal spending in July got a nice boost from the increase auto sales (Cash for Clunkers strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Weekly Economic Calendar

Date Release Comments
August 25 Consumer Confidence (08/09) Surprisingly strong showing
August 26 Durable Goods Orders (07/09) Largest increase since July 2007
New Home Sales (07/09) 4th straight rise in sales
August 27 Initial Jobless Claims (08/15) Labor appears to be stabilizing
GDP (2nd qtr) Unchanged at -1% despite more pessimistic projections
August 28 Personal Spending/Income (07/09) Spending helped by Cash for Clunkers
The Week Ahead
September 1 Construction Spending (07/09)
ISM (Manu) Index (08/09)
September 2 Factory Orders (07/09)
Fed Policy Meeting Minutes
September 3 Initial Jobless Claims (08/22)
ISM (Services) Index (08/09)
September 4 Unemployment Rate (08/09)
Nonfarm Payroll (08/09)

Money Morning/The Money Map Report

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