US Equity Markets in Positive Territory

Posted on | July 20, 2009 |

US equity markets opened in positive territory today as bankruptcy risks haunting troubled commercial lender CIT Group subsided after bondholders threw the company a $3 billion lifeline.

Investors cheered after CIT Group, the century-old lender to nearly one million small- to mid-sized businesses, rallied 90% to $1.33 a share after a group of bondholders offered the company a $3 billion loan. Unidentified sources have told Bloomberg News that the loan will be for at least two-and-a-half years and CIT will be charged an interest of 10 percentage points over three-month LIBOR (London interbank offered rate or the rate at which banks lend to each other).

CIT Group had initially tried to obtain capital from the US government. The application was, however, refused despite arguments that its failure may ‘precipitate a crisis’ for as many as 300,000 retailers – perhaps the US government had lost faith in the company after having already given it $2.33 billion of TARP funding in December when it converted to a bank holding company.

Better-than-expected earnings results from Halliburton also boded well for investor sentiment today. The second-biggest oil field services provider has unveiled a second-quarter net income of $262 million, equivalent to earnings of 29 cents a share. Although that’s nearly 50% lower than the $504 million net profit (55 cents a share) registered a year ago, this was better than Bloomberg’s average analyst estimates of 27 cents a share. Revenues at Halliburton, meanwhile, sank 22% to $3.49 billion.

David Lesar, the company’s chief executive, has warned that North American natural gas markets are likely to remain weak: ‘We believe it is unlikely that there will be a meaningful recovery in natural gas prices and, consequently, drilling activity for the remainder of the year.’ [1] Halliburton’s share price climbed nearly 2% to $21.80 a share this afternoon.

Eaton Corp also announced second-quarter earnings that topped consensus estimates. The maker of circuit breakers and fuel pumps has reported second-quarter earnings of $29 million, or 17 cents a share. After excluding one-off items, earnings came in 23 cents a share, better than Bloomberg’s average of 15 cents.

Investors didn’t seem to pay much attention to the fact that earnings were 91% lower than the $333 million reported in the second quarter of last year. Second-quarter revenues were also weaker, down 32% to $2.9 billion.

The company expects full-year profits (excluding extraordinary items) to come in between $2 and $2.20 a share, exceeding Bloomberg’s average estimates of $1.89 a share. The firm also said it will pay a quarterly dividend of 50 cents a share. ‘It isn’t pretty, but the numbers were a little better than expected,’ said Eli Lustgarten of Longbow Research in Independence. ‘Everyone expected the guidance to come down, but it didn’t come down as much and they maintained the dividend.’ [2] Shares in Eaton Corp advanced 4.8% to $47.12.

Among the best performing US stocks today was Nadsaq-listed Human Genome Sciences, which, skyrocketed 191% to $9.65 after reporting positive results for its experimental lupus drug – a development that surprised the market because it was previously thought the drug was worthless.

The latest results indicate that patients who took the drug, Benlysta, demonstrated a statistically significant improvement in symptoms as compared to those taking a placebo.

Elsewhere, Walt Disney rose 1.4% to $24.86 and CBS rose 5.6% to $7.13 after Morgan Stanley upped its recommendation on both companies to ‘overweight’. The broker also upgraded its rating on US media shares to ‘attractive’. [3]

Financial news provider Barons, meanwhile, has flagged Walt Disney, Time Warner and News Corp, saying that shares are cheap. Barons also said that Goldman Sachs could move as high as $200 a share in the next year if it continues to report strong quarterly results.

Shares in Time Warner traded 1.6% higher at $26.57, News Corp added 1.4% to $10.96 and Goldman Sachs climbed 1.5% to $156.28.

In the meantime, Bank of America fell 3.3% to $12.47 and Citigroup tumbled 5.6% to $2.85 this afternoon.

By 3.30pm (London time) the Dow Jones Industrial Average had climbed 30.53 points (+0.35%) to 8774.47 while the S&P 500 had gained 2.09 points (+0.22%) to 942.47.

Goldman Sachs raised its year-end target for the benchmark S&P 500 Index from 940 to 1,060, a rise of 12.4% from its current level, as corporate earnings continue to improve.

‘Improvement in ex-financial earnings per share, stabilisation in profit margins and higher forward EPS guidance all point to a rising market through 2009,’ wrote David Kostin of Goldman Sachs today. [4]

[1] Source: Bloomberg News (20 July 2009)
[2] Source: Bloomberg News (20 July 2009)
[3] Source: Bloomberg News (20 July 2009)
[4] Source: Bloomberg News (20 July 2009)

By Anthony Grech, Research Analyst, IG Index.

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