MARKET MOVES: A Market Assault & Battery in the Banking Sector

 
This last week of August witnessed an assault and battery on the banking sector. Around the world, banking shares plummeted, moving down multiple percentage points. Many analysts saw it coming long before the first blow was made. But, on Monday, August 27^th, the banking sector was left bruised and hurting following the “assault and battery” on its members. This attack did not surprise many people, but it nevertheless left people wondering whether any sector is safe. Or which sector is next for a market assault.  Let’s take a quick global market scan, and then return to the U.S. to investigate this market assault.

The Asian markets closed mostly downward on Tuesday, August 28^th. The Hang Seng was the biggest loser in the region, closing down 0.91 percent. However, Hong Kong’s broad-based index hit a record high on Monday, August 27^th, before Tuesday’s losing day. Profit-taking might be the reason for Tuesday’s losses, but more likely, the credit and housing woes affecting the U.S. markets are to blame for the Hang Seng’s bearish trading day. Of course, this applies throughout Asia. Japan’s Nikkei closed down 0.09 percent on Tuesday, August 28^th, following the U.S. markets’ bearish performance at the opening of the week. Taiwan’s Acer, the second largest personal maker company in Asia, announced that it will purchase the California-based company, Gateway, Inc. () sending the latter’s share price soaring 50.4 percent in a single day! One market that just can’t be held back is China’s Shanghai index, which gained 0.84 percent on Tuesday, August 28^th.  The Shanghai index’s performance was bolstered by a strong performance by China’s largest insurance company, China Life (), which gained 16.3 percent on Tuesday.

The European markets were bruised by the market assault and battery on Tuesday, August 28^th. The European Big Four group closed downward, led by France’s CAC index that lost 0.88 percent. Switzerland’s SMI lost 0.67 percent and London’s FTSE lost 0.57 percent. The European markets were definitely taken by surprise by the attack, which ended their 7-day winning streak.  The European banking sector was suffering from the attack, but struggling to regain its strength by the end of the trading day on Tuesday, August 28^th. Barclays Bank () led the banking sector downward, losing nearly 3 percent by afternoon trading. The British bank opened low, leveled out around midday, but could not tread water for very long before making a sharp late-day nosedive. Barclays is concerned about its multimillion dollar exposure to struggling German bank, Sachsen. Barclays continues to be embroiled in the takeover battle against the Royal Bank of Scotland () and Fortis, Inc. for control of Dutch bank, ABN Amro ().

Back in the United States, the credit crunch is cited as the reason for the woes suffered by the banking sector.  The credit problems in the U.S. are assaulting many sectors, including housing, but the banking sector is positioned to take the full force of the attack. And the markets are struggling. The major U.S. indexes closed downward on Monday, August 27^th, led by the S & P 500 (), which lost 0.84 percent. Economic data has to take part of the blame for the Monday’s stock market decline. Poor housing data put downward pressure on the U.S., Asian, and European exchanges. Will the markets get up, brush themselves off, and keep moving forward in this tenuous credit and soft housing environment? Or will the September data give the markets enough strong footing from which to move forward?  Stick around, folks—the show is just getting started!

Economic Data

Housing figures were released on Monday, August 27^th showing a 5-year low in existing home sales and a 16-year high in the inventories of unsold homes. Ouch! The housing market is clearly wounded. There is not a lot of data this week.  The Consumer Confidence Index was released on Tuesday, August 28^th; it is the focus report for this week so consumer confidence will be discussed more fully below. Although there is little data, the Fed will be meeting this week and releasing its minutes on Tuesday, August 28^th.  Many analysts speculated that the Fed will make its own surprise attack and decide to lower interest rates (the Fed Funds rate, this time).  Otherwise, the data will be slow during this last week of August. However, it is no surprise that next week--the first week of September--will be busy with economic data including the ISM Manufacturing Survey (Tuesday, September 4^th) and the nonfarm payrolls (Friday, September 7^th). Remember that Monday, September 3^rd is Labor Day so the markets will be closed. That could be a good time to get a bit more rest before the big market-moving reports are released.

Consumer Confidence Index—Medium Market Mover

The timing is very good for the release of this report!  The Consumer Confidence Index measures how consumers feel about the economy, their jobs, and their ability to spend. Hmm…how would the banks feel about consumer spending right now?!  In general, this report measures whether consumers are happy and feeling secure. Happy and secure consumers are willing to spend money, buy houses, increase their debt obligations, invest their money, and travel. On the other hand, sad and scared consumers will spend money only on absolute necessities and will save as much money as possible, which probably is not much money at all.  The Conference Board releases this report on the last Tuesday of every month.  In light of the credit issues and housing market concerns, this report will be watched by analysts and traders around the world. The dollar is slipping just before the report is released, which does not bode well for U.S. consumer confidence or foreign confidence in the U.S. economy. The Asian indexes want to know if there will be a market for their goods. The European indexes want to know what kind of competition to expect from the world’s largest economy. Analysts predicted that the Consumer Confidence Index fell from a revised 111.9 in July to 105.0 in August. Just released! The Consumer Confidence Index shows that the analysts got it right this time. Consumer Confidence fell sharply down to 105.0. This is the biggest fall since the days following Hurricane Katrina. This figure is the lowest since last August. Thanks, analysts!

Table 1: Declining Consumer Confidence Index Impact Chart

Well, the usual traders are taking their usual sides on the issue consumer confidence. Of course, it always seems that the affect on inflation and interest rates is almost always at the root of the discussion. With this sensitive climate, the Consumer Confidence Index is rather likely to move the markets in big and surprising ways. Together with the Fed minutes, we could have a strong market movement that either fights off the assault or succumbs to its strength. Let’s turn now to the company news and see how the market assault and battery has affected the U.S. banking sector.

Company News

Perhaps the Consumer Confidence Index really is a big market mover!  Two hours after the market’s open on Tuesday, August 28^th, the Dow () is trading down 125 points. An hour before the close, the Dow is down 159 points. Similarly, the Nasdaq () is down 39 points and the S & P 500 is trading down 22 points. Ouch!  The markets needed good news today, but it would not come from the consumers’ opinion on jobs, spending, or the economy. Together with the credit and housing issues, it seems that the markets will have to find good news elsewhere, such as from next week’s jobs and manufacturing reports. It could happen. But the markets were dealt another painful blow and will need to recover. The banking sector would have liked to hear good news, particularly following Monday’s assault on this important sector. Let’s take a look a few of the victims of Monday’s assault and consider how they are (or actually are not) recovering.

Let’s begin by noting that there are ninety-four financial stocks in the broad-based S & P 500 index. On Tuesday, August 28^th, all of the financial stocks were trading downward. Yes, that’s right. All ninety-four of the financial stocks have been hit by the bears. While they are moaning following the assault, another blow lands head on: downgrades. Merrill Lynch & Co, Inc. () has downgraded three banks to neutral from buy. Oh, that really hurts. And it is reflected in falling (or rather, plummeting) stock prices.

Citigroup, Inc. () was the first market assault victim to take a downgrade kick.  On Tuesday, August 28^th, Merrill Lynch downgraded Citigroup from buy to hold.  The company also cut its earnings expectations to 5 percent (or $4.91) stating that the Citi’s broad based business meant that any earnings difficulties could be offset in other areas of the company. Nevertheless, Citigroup’s share price fell 1.7 percent on Monday, August 27^th (shown below).

Figure 1: Citigroup, Inc. () Daily Chart – The chart will look much different on Tuesday, August 28th! Citigroup’s downgrade to hold moved the share price down to its support level at the 20-day moving average () line. The oscillator () shows that the strength of the bearish movement was weakening, but the latest news could have caused the share price to break through the support level. Citigroup is trading down 2.2 percent on Tuesday, August 28^th.

Tuesday’s downgrade hit Lehman Brothers, Inc. () much harder than Citigroup. Lehman was also downgraded from buy to hold by Merrill Lynch. Citing greater dependence on the debt market than other firms, Merrill Lynch concluded that Lehman’s earnings are likely suffer from a slowdown in the securitization and mortgage business. The bank’s earnings forecast was cut by 22 percent ($6.80) for 2008. On Monday, August 27^th, Lehman fell 4.3 percent (shown below).

Figure 2: Lehman Brothers, Inc. Daily Chart –  Lehman was struggling back up to its 20-day moving average () line when the news hit: Downgrade! Notice how the oscillator () shows very strong downward pressure from mid-July to the end of August. The share price worked hard to stop and even reverse the downward price movement. This chart will look different on Tuesday, August 28^th as shares are trading down another 4.5 percent.

The last bank to be downgraded on Tuesday, August 27^th was Bear Stearns Companies, Inc. (). Like Lehman, the primary reasons for the downgrade were the bank’s dependence on the debt markets and its financial vulnerability from this limitation.  The earnings forecast for Bear Stearns was cut by 16 percent (or $12.07) for 2008. The share price of Bear Stearns fell 4.1 percent on Monday, August 27^th.

Figure 3: Bear Stearns Companies, Inc. Daily Chart – This chart will appear very different on Tuesday, August 28^th! Like Lehman (and other banks), Bear Stearns has struggled to reverse the downward trend of its stock price. It was literally walking down the 20-day moving average () line, which served as a strong support level until Tuesday, August 28^th when it fell 1.8 percent.

Wow! This struggle by the banking sector to stop its decline has been difficult. Returning to good health has been very difficult. But its efforts were rewarded in the short term as the shares reached strong support levels. The housing figures released on Monday, August 27^th dealt a blow to the banks. Then the downgrades dealt another blow to the sector, which was already suffering from the growing credit problems. (By the way, don’t look for a scapegoat by blaming Merrill Lynch. Their actions were sound, simply pointing out the problems with the debt market and their effects in the banking sector.) The no-confidence vote from consumers this month added more fuel to push the Dow down to triple-digit losses. The final trading hour on Tuesday, August 28^th could open the door to yet another market assault. Time will tell whether the bottom has been hit or if there is still room to fall. Most analysts agree that the bottom is in sight, but has not yet been reached. Let’s see if they got it right again.

Market Moves Wisdom of the Week

Don’t fight the market!  Every week, we get more information about the state of the market’s health. Some of the data is conflicting, some of it is confusing, and some is alarming. But it gives us the context in which we conduct our trades. No matter how you feel about the data, don’t fight it. Trade with it. The Market Moves Wisdom of the Week is to use the data to find trading opportunities and to predict how the market will move. Even when the market is moving downward, great trades can be made. And profits can sometimes be made more quickly in a bear market than in a bull market. Check your ego at the door and go with the market flow. It could carry you to large and quick profits!

Robin Lofton
Staff Writer and Trading Strategist
ProfitStrategies.com