During the credit crisis of 2008-09, the problem wasn’t about earnings, the economy, or even about banks having enough cash on hand. No, it was about financial accounting. The key to the entire disaster, which eventually led to the “Great Recession” and nearly brought the global banking system to its knees, was the fact that the banks didn’t have enough of the right kind of capital on their books. As such, just about all of them came very close to being shut down. And of course, once Lehmann fell things got really ugly, really fast. Now fast forward three years and what do you see? From my perch, I see is a stock market that is plunging on fears that a similar situation is playing out. And yep, once again, it’s all about the banks. Make no mistake about it; Wednesday’s decline wasn’t about events that are actually unfolding, but rather about the fear of what might happen. From a big picture standpoint, the consensus thinking is that the EU/ECB/IMF bailout fund isn’t big enough to handle Spain OR Italy, let alone both. But with the ECB stepping in and buying up bonds of Italy and Spain this week, traders have turned their attention elsewhere – to France. First there was the rumour Wednesday morning that Societe Generale (or SocGen, as it’s commonly referred to) was on the verge of going under. And with every trader under the sun on the lookout for the next “Lehman moment,” it didn’t take long for fear to take hold. After all, everybody knows that the French own more Greek debt than anybody else (after Greek banks, of course). So, it didn’t take much imagination to think that the big French bank might actually be in trouble. The report that French President Nicolas Sarkozy had called an emergency meeting with the Bank of France and had summoned his finance ministers back from vacation certainly added fuel to the fire in the early going on Wednesday. Then the juices really got flowing with the talk of another sovereign debt downgrade possibly coming down the pike in, yep, you guessed, it; France. Never mind the fact that the French denied it, that Moody’s immediately reaffirmed their rating of France, or that S&P also said that France is AAA with a “stable outlook.” In fact, one might have expected the complete rejection of the rumour to bring on a rally. But, in case you’ve forgotten, Wednesday’s market was all about the banks. While much of the focus was on the French banks and the shellacking their stocks were taking, their American counterparts were also being taken apart again. To put things in perspective here, the BKX (the KBW Bank Index) is down -12% this week alone. Bank of America fell -10.9% on Wednesday, JPMorgan Chase dropped -5.6%, Citi was down -10.5%, Morgan Stanley dove -9.7%, and Wells Fargo lost -7.7%. In fact, according to the WSJ, all six of the biggest U.S. banks traded for less than their book value on Wednesday. Yes, it’s come to that again. Speaking of déjà vu all over again, CNBC’s interview with Societe Generale’s CEO Frederic Oudea was reminiscent of the state of denial the Wall Street banks were in before Lehman crashed and burned. Oudea told CNBC that the rumours about his bank were “rubbish,” that the bank didn’t have a capital problem, and that the situation in France is “under control.” (Sound familiar?) However, we should remember that at least for now, none of the really bad stuff that happened in 2008 is actually happening at the present time. Banks are not failing. Money market funds are not breaking the buck. Brokerage firms aren’t being sold over the weekends. As such, I’m going to suggest that fear is the primary driver at this point. And for anyone still holding substantial long positions, this is actually a good thing because some good news can turn a frown upside down pretty quickly in this game. Turning to this morning… The game remains all about the banks again this morning. European bourses and U.S. stock futures had been up nicely but have since been hit hard by rumours of problems and renewed fears regarding French banks. Europe markets are now lower and futures are pointing to a weak open. On the Economic front… Initial Claims for Unemployment Insurance for the week ending 8/6 fell by 7,000 to 395K. The report was better the consensus estimate for 400K and last week’s revised total of 402K. Continuing Claims for the week ending 7/30 came in at 3.688M vs. 3.707M and last week’s 3.747M. Thought for the day… Don’t forget to check the happiness box today… Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell… * Major Foreign Markets: o Australia: -0.09% o Shanghai: +1.27% o Hong Kong: -0.95% o Japan: -0.63% o France: -2.52% o Germany: -1.41% o Italy: -2.89% o Spain: -2.04% o London: -0.92% * Crude Oil Futures: -$1.40 to $89.41 * Gold: -$1.40 to $1782.90 * Dollar: higher against the Yen and Euro, lower vs. Pound * 10-Year Bond Yield: Currently trading at 2.148% * Stocks Futures Ahead of Open in U.S. (relative to fair value): o S&P 500: -8.56 o Dow Jones Industrial Average: -62 o NASDAQ Composite: -1.6 Wall Street Research Summary Upgrades: * NYSE EUronext (NYX) – Argus Research * Regions Financial (RF) – BofA/Merrill * Zions Bancorp (ZION) – BofA/Merrill * Altera (ALTR) – Barclays * Intel (INTC) – Barclays * Cymer (CYMI) – Barclays * Schlumberger (SLB) – Bernstein * Human Genome (HGSI) – Cowen * Electronic Arts (ERTS) – Cowen * Advance Auto Parts (AAP) – Credit Suisse * SLM Corp (SLM) – Added to Top Picks List at FBR Capital * IntercontinentalExchange (ICE) – Goldman Sachs * Noble Energy (NBL) – Goldman Sachs * Anadarko Petroleum (APC) – Goldman Sachs * Western Refining (WNR) – Goldman Sachs * Exxon Mobil (XOM) – Goldman Sachs * Cheesecake Factory (CAKS) – Lazard * Cree (CREE) – Morgan Stanley * Cisco Systems (CSCO) – Morgan Stanley, Stifel Nicolaus * Colgate-Palmolive (CL) – Morgan Stanley * Chevron (CVX) – Oppenheimer * Realty Income (O) – RBC * Kimco Realty (KIM) – UBS * Simon Property (SPG) – UBS * Taubman centres (TCO) – UBS Downgrades: * analogue Devices (ADI) – Barclays * Micron (MU) – Barclays * NVIDIA (NVDA) – Barclays * Xlinx (XLNX) – Barclays * Kinross Gold (KGC) – Credit Suisse * Evercore Partners (EVR) – Goldman Sachs * Plains Exploration (PXO) – Goldman Sachs * Cabot Oil & Gas (COG) – Goldman Sachs * Walt Disney (DIS) – Goldman Sachs * Sunoco (SUN) – Moody’s downgraded long-term debt * Aeropostale (ARO) – Target cut at RBC * Ultra Petroleum (UPL) – Wells Fargo
Yesterday’s Earnings After The Bell
Estimate Cisco Systems CSCO $0.40 $0.38 Jack In The Box JACK $0.25 $0.40 Kinross Gold KGC $0.20 $0.17 News Corp NWSA $0.35 * $0.30
Earnings Before The Bell
Estimate Briggs & Stratton BGG $0.32 $0.42 Kohl’s KSS $1.09 $1.08 Sara Lee SLE $0.20 $0.20 SodaStream SODA $0.42 * $0.30* Report includes items that make comparisons to the consensus estimate questionable
Long positions in stocks mentioned: none
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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