Investors await bank earnings
NEW YORK – Wall Street and stock market investors in general aren’t feeling much love for Ben Bernanke these days.
Stocks plunged on Tuesday after the Federal Reserve chairman and his fellow Fed policymakers cut interest rates by a quarter-point, disappointing those hoping for a half-point reduction.
A surprise announcement a day later by the Fed and four other central banks of a plan to increase the supply of dollars in both Europe and the U.S. has drawn catcalls from some who say it won’t do much to diffuse the global credit crisis.
By week’s end, the Dow Jones Industrial Average had fallen 3.1 percent from where it was just before Tuesday’s Fed rate decision was released. Such a downdraft underscores the growing anxiety over credit woes and how it might spill into everything from dealmaking to corporate earnings in 2008.
“Investors are skittish,” said Arthur Hogan, chief market analyst at Jefferies & Co. “If you look at the magnitude of the headwinds hitting the market and the brand of medicine we’re getting from the Fed, it is hard to say we’ve got the right dosage.”
Market participants like Hogan say one of the key “tells” for investors about how Wall Street is navigating the market dislocation is the performance of financial stocks, a sector many believe must get healthy before the market can rally.
The nation’s big investment banks and brokerages are on the front lines of the credit crisis, and have taken some pretty big fiscal hits stemming from the collapse of the subprime mortgage industry. That’s why Wall Street is paying close attention to their quarterly earnings reports.
Also weighing on investors is the future for “structured investment vehicles,” or SIVs, which are investment funds created by banks and sold to investors. The funds borrow short-term money and invest it at a higher rate in mortgage, bank and credit card debt.
Citigroup Inc. said it plans to assume control of the seven SIVs it advises to help them repay lenders. The viability of a SIV hinges on its ability to continue borrowing short-term money – and that’s been disrupted by the credit freeze.
What’s more, massive losses from these investments could be yet another assault to the financial industry’s earnings power.
Erin Callan, Lehman’s chief financial officer, said “November was absolutely the worst month ever on record for the fixed-income markets.” It’s a powerful statement considering the summer’s market turmoil knocked the Dow Jones industrial average down 10 percent before later recovering.
Though top bank executives are hesitant to say the worst is over, there are some positive signs banks can weather crisis into 2008. For instance, Lehman Brothers Holdings Inc. was able to offset fixed-income losses thanks to strength in its merger and acquisition advisory business, and there’s hope others can do the same.