Journalists often employ the term “staged” in their coverage of the markets, as in “Wall Street staged a rally”, and it is particularly appropriate in the context of the 480-point rise of the Dow Jones index over the last two days. The media has attributed the gains to a succession of “better-than-expected” earnings reports, combined with the sharp drop in oil prices.
But a number of analysts are whispering that what we are really witnessing is an insider’s short covering rally. It is important to remember that even with the increases, the market closed Thursday at 11,447, just 23 points above official bear territory.
According to the Associated Press, this morning’s good news is the $2.5 billion second quarter loss posted by Citigroup :
“Citigroup posted another loss and laid off 6,000 employees in the second quarter as it struggled with surging loan defaults, but the $2.5 billion shortfall was smaller than Wall Street anticipated
Citi’s shares rose 5 percent in premarket trading Friday and helped boost the broader market, whose grim prognosis for the U.S. financial system this year sent stocks plummeting.
The nation’s biggest banking company by assets lost the equivalent of 54 cents per share in the April-June period. In the same timeframe last year, the bank earned $6.23 billion, or $1.24 per share.”
Much further down in the AP article, there is this brief summary of the banking giant’s recent performance :
“Citigroup has failed to turn a profit for three straight quarters, losing a cumulative $17.4 billion during that period after writing down its assets by about $46 billion. Its shares have tumbled 65 percent over the past year, and recently hit their lowest point since the day Citicorp and Travelers combined in October 1998.”
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In a similar vein, yesterday the Financial Times covered the reaction to JP Morgan Chase’s second quarter earnings report, which saw profits cut by more than 50 percent :
“JP Morgan, which acquired its stricken rival Bear Stearns for a cut-price figure in March, saw profits fall by more than half during the period, hit by the credit crunch, the US housing crisis and the cost of the Bear acquisition.
However, its net income of $2bn, or 54 cents a share, beat Wall Street’s expectations of 44 cents a share, thanks to strong results in its commercial banking and treasury operations. In the same period last year, the bank made $4.23bn, or $1.20 a share.”
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In this context it is difficult to outdo Wells Fargo, which reported on Tuesday. The bank suffered a 23 percent drop in 2Q earnings and responded by rasiing its dividend! CNN reported :
“Wells Fargo reported a 23% decrease in its second-quarter net income as the nation’s fourth-largest bank by stock market value set aside $3 billion for loan losses.
The bank recorded net income of $1.75 billion, or 53 cents a share, down from $2.28 billion, or 67 cents a share, a year earlier. But the earnings beat the mean estimate of analysts polled by Thomson Reuters, which expected earnings of 50 cents a share.”
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If these earnings reports are legitimate reasons for a bullish stock market, one has to wonder why the disappointing earnings published by behemoths Microsoft, Google, and Merrill Lynch have so far failed to have an equivalent downside impact.