Wall Street opened lower, as earnings at Goldman and Citigroup failed to excite the market.
We’re seeing some profit taking today, not because the figures are disappointing but mainly because the markets have, undeniably, risen quite a bit recently and today’s data may have already been factored in. Essentially, we’re seeing a classical ‘buy on the rumour sell on the news’ scenario.
Goldman Sachs today reported third-quarter earnings that exceeded analysts’ estimates after profiting from trades made with its own money.
The bank, which was recently downgraded from ‘buy’ to ‘neutral’ by banking analyst Meredith Whitney reported third-quarter net income of $3.19 billion, or $5.25 a share today. This was nearly 11% higher than Bloomberg’s most optimistic analyst estimate of $4.75 a share and substantially ahead of last year’s comparative of $845 million, or $1.81 a share. Earnings were, however, 7.3% lower than the second quarter’s record $3.44 billion.
Third-quarter revenues also exceeded expectations, doubling to $12.4 billion from $6.04 billion in the previous year. Revenues from fixed-income, currency and commodity trading surged 274% to $5.99 billion and revenues from equities up 78% to $2.78 billion.
Citigroup, which is 34% owned by the American taxpayer, also defied analysts expectations by unveiling a $101 profit compared with a loss of $2.82 billion the same comparative period a year ago.
On a per share basis, Citigroup incurred a loss of 27 cents a share, however, owing to a charge related to the exchange of certain preferred shares into common stock. The loss per share was, nevertheless, smaller than Bloomberg’s median estimates for a 29 cent loss.
Now here’s the thing, Citigroup was ahead of expectations because management were less prudent with the bank’s loan loss reserves - something that could come back and haunt the bank in coming quarters. ‘They are being overly optimistic on the outlook for loan losses,’ said Jon Fisher of Fifth Third Asset Management. ‘We are going to find out in a couple of quarters that they are way under-reserved and they are going to have to take a huge charge.’ [1]
Goldman’s shares fell 2.12% to $188.18 while Citigroup plunged 4.6% to $4.77 a share this afternoon. Bank of America retreated 2.8% to $18.06 while Wells Fargo edged 0.8% lower to $31.08
On the economic front, the Labor Department’s jobless claims figures signalled some life returning to the embattled American labor market.
The number of Americans claiming first-time jobless benefits (initial jobless claims) unexpectedly fell 10,000 to a seasonally adjusted 514,000 in the week ended October 10, the lowest level since January. This was better than Reuters expectations for a rise to 525,000 from a previously reported 521,000 the week before.
In the meantime, the four-week moving average for initial claims dropped by 9,000 to 531,500 last week, the sixth straight weekly decline.
Even more encouraging, the total number of American collecting unemployment benefits for more than week dropped by 75,000 to 5.99 million in the week ended October 3. That was the first time that the so-called continuing claims had dropped below the 6 million mark since late March. This measure has trended lower for four consecutive weeks.
Although a drop in jobless claims may be positive, the fall could also suggest that unemployed Americans have exhausted their unemployment benefits. However, in view of today’s remarkable manufacturing data, I think the drop in claims is pointing more to a recovery than anything else.
The manufacturing data released from the Federal Reserve Bank of New York surprised to the upside, with manufacturing activity in the region unexpectedly expanding for a third straight month in October.
The bank’s general economic index surged to a reading of 34.6 this month, the highest in five years, from 18.9 in September. The majority of economists surveyed by Bloomberg expected the Empire manufacturing gauge to drop to 17.3.
A separate regional manufacturing survey, meanwhile, revealed that activity in the Philadelphia region continued to expand this month, yet slower than expected. The Federal Reserve Bank of Philadelphia’s general economic index dropped 2.6 points to 11.4 in October, which was slightly larger than Bloomberg’s expectations for a drop to 12.
Elsewhere, the Consumer Price Index and core consumer price index, which strips out volatile food and energy prices, both gained 0.2% in September, in line with consensus expectations.
‘Inflation remains muted,’ said Jennifer Lee of BMO Capital Markets. ‘There is still much excess capacity to absorb; retailers are still fighting for their share of consumers’ shrinking wallets.’ [2]
By 3:55pm (London time) the Dow Jones Industrial Average was 22.82 points (-0.23%) in the red at 9993.04 while the broader S&P 500 was 3.55 points (-0.33%) lower at 1088.47.
Back in London, markets were also under some pressure, with the blue-chip FTSE 100 down 14.81 points (-0.28%) at 5241.29.
Sainsbury’s was in the limelight this afternoon, surging nearly 20% to 373p a share on takeover speculation. Analysts at Royal Bank of Scotland said that the ‘Sainsbury family have accepted a 420p bid’ from Qatar.
‘A 420p bid in our view would seem way too low,’ wrote Justin Scarborough of Royal Bank of Scotland in the note today. ‘We would of course never say never, but the family would not accept 600p back in November 2007, which led to the Qataris walking away.’ [3]
Source: [1] [2] [3] Bloomberg News (15 October 2009)
By Anthony Grech, Research Analyst, IG Index.
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