In the heart of earnings season, stock
market investors will scrutinize a raft of regional bank
earnings this week for more write-offs that could send the
The S&P 500 and the Nasdaq snapped a six-week losing streak
on Friday with financials helping to drive the market higher on
the back of stronger-than-expected results from the likes of
Citigroup, JPMorgan Chase and Wells Fargo. A sharp drop in oil
prices improved sentiment and lifted the market.
For the week, the Dow Jones industrial average gained 3.6
percent, its best week in three months, while the Standard &
Poor's 500 Index rose 1.7 percent and the Nasdaq Composite
Index advanced 2 percent.
Still, while the week ended with financial services as the
second-biggest boost to the S&P 500, regional banks were one of
the heaviest drags. The S&P Regional Banks index ended Friday's
session down 0.8 percent.
After U.S. banking regulators swooped in on July 11 to take
over IndyMac Bancorp Inc(IMB.N), making it the fifth U.S. bank
to fail this year, investors will key in on regional bank
results as a measure of how the U.S. banking system is holding
up in a fragile economy.
"Most of the major financial institutions have reported, so
there's going to be attention on the flow coming in from the
regional banks. We'll be watching for write-offs on the
regional banks," said Fred Dickson, market strategist and
director of retail research at D.A. Davidson & Co in Lake
Bank of America Corp (BAC.N), the No. 2 U.S. bank,
headlines the week with its Monday earnings report. Regional
banks in the spotlight will be Regions Financial Corp (RF.N),
Fifth Third Bancorp (FITB.O), SunTrust Banks Inc (STI.N) and
This week also will usher in earnings from large-cap
companies, including Dow components Pfizer Inc (PFE.N), AT&T
(T.N), and Caterpillar (CAT.N), as well as Nasdaq stalwarts
Apple Inc (AAPL.O), and Yahoo! Inc (YHOO.O).
The week ahead "is going to be a heavy reporting week, so
the continuing wave of second-quarter earnings reports will be
important," Dickson said.
BEARS ON A SHORT LEASH
This week also marks the start of an emergency rule
introduced by the U.S. Securities and Exchange Commission that
will limit certain types of short selling in the stocks of 19
major financial companies, including all the major investment
banks as well as the huge mortgage finance companies Fannie Mae
(FNM.N) and Freddie Mac (FRE.N).
"The short-selling announcement last week really set the
stage for the bounce in financials on Wednesday, and that's
been a big psychological lift for investors," Dickson said.
Short sellers make bearish bets that a stock's price will
fall. On its own, short selling is a legitimate investment
But the SEC aims to curb abusive "naked" short selling,
where investors have not actually borrowed the stocks before
the short sale occurs.
Last Sunday, on July 13, the U.S. Treasury and the Federal
Reserve unveiled a rescue plan for Fannie Mae and Freddie Mac
in an attempt to shore up confidence that the twin pillars of
the U.S. housing market will continue in that role.
The survival of Fannie Mae and Freddie Mac is deemed
crucial to the soundness of the U.S. banking system because the
two companies own or guarantee almost $5 trillion of mortgage
debt -- or about half of all U.S. mortgages. They provide
liquidity to the U.S. home loan market by buying mortgages and
repackaging them into securities such as mortgage-backed bonds.
Investors will take note of two Fed speakers this week.
On Tuesday, Charles Plosser, the president of the Federal
Reserve Bank of Philadelphia, will speak about the economic
outlook at a breakfast meeting of bankers, financial service
providers, and business leaders.
On Thursday, Timothy Geithner, the president of the Federal
Reserve Bank of New York, and SEC Chairman Christopher Cox are
set to testify before a House Financial Services Committee
hearing on "Financial Market Regulatory Restructuring."
Last week, Federal Reserve Chairman Ben Bernanke painted a
gloomier economic picture than he had in previous public
remarks. He urged lawmakers to approve the Treasury
Department's proposals to back up mortgage markets. He made the
comments during two days of testimony before congressional
committees when he gave his semiannual report on the economy
and monetary policy.
"If you can see some of the stabilization in the likes of
Freddie Mac and Fannie Mae, that will be a big positive, and
gradually you're going to reinforce and renew the trust and
confidence back into the system. That's what we're kind of
waiting for and it will take time," said Alan Lancz, president
of Alan B. Lancz & Associates Inc, an investment advisory firm
in Toledo, Ohio.
HOME SALES AND CONSUMER SENTIMENT
Investors will get more insight into the housing market
this week when June existing home sales come out on Thursday
and new home sales are released on Friday. Existing home sales
are forecast to slow to an annual rate of 4.93 million units in
June from May's pace of 4.99 million, according to economists
polled by Reuters. New home sales are expected to dip to an
annual rate of 500,000 units in June from a pace of 512,000
units in May, the Reuters poll showed.
Friday will also shed light on how U.S. consumers view the
economy, when the Reuters/University of Michigan consumer
sentiment survey will be released. Analysts expect the final
July reading to stay at June's 28-year low.
OIL SKIDS BELOW $129
Oil may also determine the market's direction next week.
Last week, Wall Street and Main Street dared to hope that
things might get better as the price of oil tumbled on Friday
in its biggest weekly drop -- in dollar terms -- since oil
futures began trading on the New York Mercantile Exchange in
Evidence of lower demand due to the weak economy helped
drive U.S. oil futures for August delivery down on
Friday to a session low of $128.23 -- a drop of $19.04 from the
record intraday high of $147.27 set on July 11. In percentage
terms, that represented a 13 percent slide.
NYMEX August crude settled on Friday at $128.88 a barrel.
But uncertainty created by geopolitical concerns and the
potential for natural disasters could make the difference in
whether oil prices continue their fall or shoot back up.
"If the economy keeps getting weaker, you may see oil tick
off a bit more in the short term as demand slows. But the
longer-term trend for oil is still higher," said Thomas Nyheim,
vice president and portfolio manager at Christiana Bank & Trust
Co in Greenville, Delaware.
Dickson of D.A. Davidson pointed out that "the fact is,
we're moving into hurricane season so Gulf storms will always
be on the radar. We also seem to have had an easing in tensions
between Iran and Israel, but if something new brews there, that
could reverse. It does seem the oil market has responded to
some demand destruction in India and the possibility of less
oil use in China as they gear down investor operations ahead of
(Wall St Week Ahead runs weekly. Questions or comments on
this column can be e-mailed to: firstname.lastname@example.org)
(Additional reporting by Kristina Cooke, Steven C. Johnson,
Cal Mankowski and Ellis Mnyandu; Editing by Jan Paschal)
The U.S. economy needs months to
recover from its slowdown, but the banking system remains sound
despite a home mortgage crisis that could cause more problems,
Treasury Secretary Henry Paulson said.
Paulson also said on Sunday morning news programs he was
optimistic Congress would approve the Bush administration's
request for authority to shore up the troubled mortgage giants
Fannie Mae (FNM.N) and Freddie Mac (FRE.N).
The treasury secretary has been trying to reassure nervous
financial markets and is scheduled to deliver an important
speech on markets and the economy in New York on Tuesday.
"We're going to be in a period of slow growth for a while,"
Paulson told "Face the Nation" on CBS. "I think it's going to
be months that we're working our way through this period."
High energy prices would prolong the slowdown, but the key
to recovery was stabilizing the housing market, Paulson said.
He added that U.S. banking problems were manageable despite
this month's highly publicized failure of mortgage lender
The July 11 takeover of the bank by Federal regulators
marked the third-largest bank failure in U.S. history. The
lines of frustrated depositors outside its doors provided a
stark illustration of the U.S. home financing crisis.
"Our banking system is a safe and a sound one," Paulson
insisted on CNN's "Late Edition."
He had earlier told CBS, the list of troubled banks would
grow. But "this is a very manageable situation ... our
regulators are focused on it."
Five U.S. banks have failed this year, compared with an
annual average of about 250 during the U.S. savings-and-loan
industry crisis in the 1980s, Paulson said..
99 PERCENT HEALTHY
He said about 99 percent of the 8,500 U.S. banks, holding
about 99 percent of bank assets, fell into the highest category
of capitalization, a measure of financial health.
However at the end of the last quarter, the number of
problem banks on the Federal Deposit Insurance Corp.'s watch
list rose to 90 with combined assets of $26 billion, up from 76
with $22 billion at the end of 2007.
Ensuring confidence in U.S. financial markets was crucial
to reviving the housing industry and the broader economy,
To that end it was essential that Congress approve the
stability plan for Fannie Mae and Freddie Mac, which are
responsible for 70 percent of U.S. home loans.
Treasury asked Congress for unlimited authority to lend
money to the troubled mortgage companies and to buy their stock
if necessary to inject fresh capital. Some Republican lawmakers
have balked at the prospect of a blank check that could cost
U.S. taxpayers billions of dollars.
But Paulson told CBS he was "very optimistic we're going
get what we need from Congress here, because Congress
understands how important these institutions are."
The stability package would be accompanied by stronger
regulation and oversight of the two banks, he said.
In an interview with the Financial Times published on
Saturday, Sen. Richard Shelby, the top Republican on the Senate
Banking Committee, said he believed legislation shaped around
the administration's rescue plan could reach the president
before Congress takes a summer break at the end of the month.
(Additional reporting by David Lawder, Glenn Somerville and
Tim Ahmann, editing by Philip Barbara and Alan Elsner)
The U.S. housing crisis
looks pretty distant when viewed from the cornfields of middle
America, although land values pushed up by record commodity
prices also evoke past booms that ended in bust.
Farm prices in the corn belt jumped an eye-popping 20-plus
percent last year. Economists at the Kansas City Federal
Reserve say that so far, the gains seem to be based on
anticipated profits from future harvests, not speculation.
If prices suddenly turned lower, the sector could suffer,
and it would not be the first time. Farm values collapsed 40
percent between 1982-87, squeezed by higher production costs
and lower agricultural earnings.
"If prices stay put we're somewhat better, but if they
don't, we're somewhat in trouble ... It's not all roses," said
Dennis Kvatum, a soybean and wheat farmer in Beardsley,
On the other hand, farmers have far fewer debts than in the
1970s and 1980s, giving them a decent cushion.
"Rising farmland values might be a sign of a bright, new,
golden age in agriculture -- but they are not without risks,
noted the Kansas City Fed's latest Economic Review.
In the meantime, the rest of the regional economy is
benefiting from the sector's strength, albeit with typical
"Our business is really not bad. In fact, it's pretty
good," said Mike Haverty, chief executive officer of Kansas
City Southern (KSU.N) railway, whose trains haul cargo like
coal and grain for export to ports in Mexico.
Surging energy costs have not dented the railroad man's
enthusiasm because strong demand has helped him to pass along
roughly 70 percent of these increases to customers.
A monthly manufacturing survey by the Kansas City Fed of
its district declined in June, but it did show that companies'
expectations for future activity remained positive and export
activity was solid.
The Kansas City Fed's seven-state district spans the
farming heartland of Oklahoma, Kansas, Nebraska and western
Missouri, as well as the Rocky Mountain states of Colorado,
Wyoming and northern New Mexico, where energy and ranching, as
well as tourism, are economically dominant.
"The major food exporters, energy and commodity producers
of our district are doing well," Kansas City Fed President
Thomas Hoenig told Reuters in an interview earlier this month.
"Our housing industry is under pressure, but by much less
than in southern California," he said, referring to a region of
the country at the heart of the subprime mortgage meltdown.
U.S. agricultural exports have skyrocketed more than 40
percent this year due to both higher prices and larger volumes,
amid soaring demand from markets like India and China, whose
massive emerging middle classes want to eat more and better.
The benefits of this boom have been felt broadly, with
retail sales taxes up in neighboring Nebraska, for example, in
an indication that consumers have continued to spend and buoy a
service sector suffering at a national level.
"Record high commodity prices have lifted farm
profitability and that has spilled over into capital spending,"
said Jason Henderson, a rural economist and head of the Omaha
branch of the Kansas City Fed.
"We're going to have some solid growth in 2008 and our
service sector is holding up well," he said, adding that west
Nebraska may be one of the few places in the country where
demand for SUVs has defied $4-plus gasoline.
The Kansas City Fed calculates an index of farm incomes and
capital spending based on a survey of agricultural banks.
This gauge soared to around 160 during 2007 from a reading
near 100 in the fourth quarter of 2006, with capital spending
tracing a similar climb. But the pace of gains for both were
expected to slow over the coming months.
"Rising input costs are limiting crop profit margins.
Livestock producers are posting huge losses due to higher feed
costs," it noted in its most recent survey of agricultural
credit conditions, which covered the first quarter.
On top of margin pressures, higher commodity prices also up
the ante for agricultural businesses that have to buy and store
produce at the higher prices, and finance these inventories
with bank credit.
"Your county grain elevator used to need a credit line of
$10 million and now that is more like $40 million," said Paul
DeBruce, chief executive of DeBruce Grain, a huge private grain
distributor with $4.6 billion of turnover in fiscal 2008.
Some if his grain elevators customers were negotiating
harder on when they would get paid than on price -- an
indication of their need for cash -- and order backlogs for
agricultural equipment were lean, in a sign of slowing demand.
"The industry is not in trouble, but it is under strain,"
the Kansas City-based DeBruce said.
(Editing by Maureen Bavdek)