Friday, May 8, 2009

Financials, Market Rally Following Release Of "Stress Test" Results Thursday Evening

Well, the recent propensity for short-lived pullbacks and active dip buying was in effect again today as some ugly reversals after a gap higher at the open gave way to a steady upward trend as the day developed. Financials were once again the leader on the day as market players cheered the official release of the bank stress tests, while rising oil prices helped energy names show a good deal of relative strength. Interestingly, though, there were more than a few recent momentum names, such as DRYS, which took a big hit after a few analyst downgrades and a share offering. Meanwhile, leading areas such as tech and retail also are showing signs of losing steam.

The hope, however, is that market players are now shifting their focus to other areas after catching a great wave. We’ll see if that turns out to be the case, and if it is, that will be a sign that this market’s recent run may have legs yet.

Going into more detail, the major indices settled with solid gains on Friday, as financial institutions rallied after the government released the results of its stress test. Meanwhile, the number of job losses in April slowed, another indication that the pace of economic contraction is decelerating. Eight of the ten economic sectors posted a gain. Financials led the way, surging 8.3%. The energy sector also had a strong showing, climbing 4.2%, after crude prices rose 3.1% to $58.47. Defensive sectors underperformed, with telecom (-0.4%) falling into the red after shares of T slid on reports that the company is near a deal to buy $2.5 billion in Alltel assets from VZ... The strength in financials came after the close Thursday when the government announced the findings of its much anticipated stress test on 19 major financial institutions. The government has instructed 10 financial institutions to raise more capital by June 8. The $75 billion in new capital requirements includes: BAC, $33.9 billion; WFC, $13.7 billion; GMAC, $11.5 billion; Citigroup, $5.5 billion and MS, $1.8 billion... The remaining five banks that need more capital are regional banks: RF, $2.5 billion; STI, $2.2 billion; KEY, $1.8 billion, FITB, $1.1 billion; PNC, $600 million... The companies are utilizing several ways to increase their common equity ratios, including common stock offerings, converting preferred shares and selling assets... BofA plans to raise $17 billion in a common stock issue, with the remaining coming from preferred stock to equity conversion and asset sales. Wells Fargo is issuing common stock (~$7.5 bln announced this morning), retaining earnings and utilizing other internally generated sources. Citigroup will expand its previously announced conversion of preferred to common. GMAC said it may issue new common equity, issue mandatory convertible preferred shares or convert existing equity into a form of Tier 1 common equity. In addition, Morgan Stanley (MS), which was directed to raise $1.8 billion by the government, priced 146 million shares of its stock, and a 21.9 million over-allotment, at $24 per share... In other notable corporate news, shares of MCD rose 2.9% after the fast food giant reported that April same-store sales rose 6.9%, the 72nd consecutive monthly increase... In economic news, released at 10:00 ET, wholesale inventories dropped 1.6% in March, after falling 1.7% in February. The decline was worse than the consensus estimate that called for a 1.0% decline. The major indices gave up some gains after the release, but the market managed to trend higher throughout the session, eventually climbing above pre-release levels... Separately, the April employment report was released at 8:30 ET. The April decline in payrolls of 539,000 was better than the expected decline of 600,000, but still represents bad economic news. Part of the smaller decline is explained by a 72,000 jump in government payrolls, compared to the sharp drop in the private sector, including a 149,000 decline in manufacturing and 110,000 in construction. Also on the negative side, several prior months were revised lower, and the unemployment rate jumped to 8.9% from 8.5%, as expected. The stock market had a relatively muted response in premarket trade compared to the typical response to this release... For the week, the Dow, Nasdaq, S&P 500 rose 4.4%, 1.2% and 5.9%, respectively. Financials spiked 23% on the week.

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