| Commentary | |
Tug of war on Wall Street
More woes about banks and the economy will probably overshadow good news from Motorola and Ford. But investors seem to be taking the bad news in stride.
NEW YORK (CNNMoney.com) -- If you've been pessimistic about the stock market, you would think you'd have plenty of reasons to gloat today.
Influential bank analyst Meredith Whitney of Oppenheimer slashed her earnings targets for Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Wachovia (WB, Fortune 500). Whitney now expects Citigroup to report a loss this year.
What's more, Goldman Sachs analyst Brian Foran cut his earnings projections for Bank of America.
The bad news extends beyond the banking sector. The $19 billion deal to take radio company Clear Channel Communications (CCU, Fortune 500) private is reportedly close to collapse due to the problems in the credit markets.
And perhaps most disturbing of all, new orders for durable goods - a key measure of the health of the manufacturing sector - fell 1.7% in February. That could be viewed as another sign of recession.
But despite this series of alarming headlines, stocks fell only modestly at the open Wednesday. That could be yet another sign that investors are slowly but surely getting used to bad news and are looking ahead to a possible recovery later in the year.
After all, considering that the markets surged last Thursday and on Monday and were relatively flat yesterday, you could argue that stocks would be due for a big pullback on bad news. So far, this doesn't appear to be happening.
"Wall Street has not yet got back its animal spirit. The markets are still trading tentatively and it wouldn't take a lot to create some negativity. But the positive momentum is strong lately," said Jim McCaughan, chief executive officer of Principal Global Investors.
McCaughan said that investors now have a sense that the Federal Reserve and Treasury Department are taking the necessary steps to make sure that the turmoil in the financial sector does not deepen.
Although I argued yesterday that the Fed's bailout of Bear Stearns might not be the right message to send to investment banks, there is no denying that it's given investors a much needed confidence boost.
"Do I think the worst is over in the credit crisis? Probably yes. I'm cautiously optimistic and the main reason is the market seems to be believing now that the Fed and Department of Treasury will do what they need to do to restore orderly markets," McCaughan said.
If this is true, it's obviously an encouraging sign for the markets. But there are actually other pieces of good news to be found if investors look beyond the banking sector.
Motorola (MOT, Fortune 500), bowing to pressure from activist shareholder Carl Icahn, announced Wednesday that it was breaking up into two companies - one for its cell phone business and one for the rest of its broadband networking and communications divisions.
Wall Street approved the move, bidding up shares of the company by 5% early Wednesday.
In other corporate news, Ford (F, Fortune 500) finally cut ties with Jaguar and Land Rover, agreeing to sell those brands to Indian automaker Tata. The sale could help Ford win back market share in the United States as it will allow the company to focus more on its core Ford brands, such as Lincoln and Mercury.
And even though the Clear Channel deal is likely to fall apart, there are two other prominent companies that are "in play" which could wind up getting more money from their prospective buyers.
Video game publisher Take-Two Interactive once again rejected a bid from rival Electronic Arts but left the door open for a sale (presumably at a higher bid) from EA after the company's new "Grand Theft Auto IV" comes out next month.
The Take-Two news comes one day after an influential Internet analyst at Citigroup suggested that Microsoft would raise its bid for search engine Yahoo from $30 to $34.
If EA and Microsoft both eventually pony up more cash for Take-Two and Yahoo, that would be further proof that there are still many companies outside of banking that have healthy balance sheets and are able to use their cash and stock to make strategic deals. That's a good thing.
So with many companies set to start reporting first-quarter earnings in the next few weeks, expect the tug of war between bears and bulls to continue.
If investors can look past what is likely to be another brutal quarter for financials and focus on strength in other areas of the market, that would be encouraging. But nothing is certain in a market as fragile as this.
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