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From Times staff writer Walter Hamilton:
Who would have expected Citigroup Inc. to ride to the rescue of the financial sector?
The banking giant reported a smaller-than-expected second-quarter loss this morning, relieving some of the pressure on financial issues that was expected the day after Merrill Lynch & Co. uncorked terrible results.
Citigroup Inc. lost $2.5 billion in the quarter (54 cents a share), wrote off $7.2 billion in mortgage-related debt and recorded an additional $7.2 billion in credit costs -- mostly also tied to the housing meltdown, as consumer loan losses mount.
But analysts had expected the New York-based company to lose about $3.7 billion, according to Bloomberg data, and to suffer a larger asset write-down.
 Given that anything less than a catastrophe passes for good news these days in the financial industry, Citigroup's shares are getting a bounce, for a third straight session. The stock was up $1.59, or almost 9%, to $19.56 about 10:30 a.m. PDT. After reaching a nearly 10-year low of $14.56 on Tuesday, the shares rebounded 13.1% on Wednesday and 9.1% on Thursday.
Short sellers -- traders who had borrowed Citi stock and sold it, betting the price would keep falling -- probably are helping to push it higher today as some of them close out their bets. The total of shorted shares of Citigroup reached 152 million as of June 30, up from 108 million just since mid-May.
The financial stock sector index of the Standard & Poor’s 500 initially fell early today after Merrill’s larger-than-expected quarterly loss, reported after the closing bell Thursday. But the index was up about 0.6% at 10:30 a.m. PDT after surging 19.6% in the two previous sessions.
"All things considered, it was a decent quarter for Citigroup," William Tanona, an analyst at Goldman Sachs Group, wrote in a note to clients.
Still, Citigroup's report underscored the heavy exposure that the mastodons of American finance continue to have to the subprime mortgage market. The company’s subprime assets were reduced from $29.1 billion in the first quarter but still totaled $22.5 billion as of June 30.
Citigroup was able to sell or otherwise dispose of $3.2 billion in subprime assets but got rid of the biggest chunk -- $3.5 billion -- by simply writing it off.
Analysts expect that to continue for the foreseeable future.
"We still believe the company will face additional write-downs on these assets in coming quarters," Tanona wrote.
Photo: Citigroup's headquarters in New York. Credit: Justin Lane / EPA
From Times staff writer Walter Hamilton:
Merrill Lynch & Co. just threw cold water on the idea that the housing crisis was letting up on Wall Street.
Better-than-expected second-quarter earnings from Wells Fargo & Co. on Wednesday and JPMorgan Chase & Co. this morning had boosted hopes that major banks and brokerages could sidestep more worst-case profit hits from the housing collapse.
Earnings dropped at both Wells and JPMorgan, but far less than analysts had feared. Wells even raised the dividend on its stock.
But Merrill late today reminded investors that the end isn't close for companies that played in the deep end of the pool during the housing boom.
 The New York-based brokerage giant reported after the end of regular trading that it lost $4.7 billion in the latest quarter, or $4.97 a share, including almost $10 billion in write-offs tied largely to the faltering mortgage-securities market. The numbers were significantly worse than even the most pessimistic analysts had expected.
The news drove Merrill's shares down $1.97 to $28.76 in after-hours trading. The stock had jumped $2.73 to $30.73 in the regular session amid another big rally in financial shares.
The upshot, it seems, is that "the companies that have been steady sources of bad news will continue to be sources of bad news," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.
Merrill's latest write-offs included $3.5 billion for those exotic -- and toxic -- mortgage securities known as collateralized debt obligations, and $1.3 billion for residential-mortgage "exposures."
On the company's earnings conference call today, one analyst asked Merrill CEO John Thain a technical question about the CDOs "you guys" created.
Thain shot back: "First of all, I take exception to the 'you guys' comment. I did not create any of these CDOs."
Thain, 53, took the brokerage's helm in December after Stanley O'Neal got the boot.
Like others, Merrill has been scrambling to get bad assets off its books. It slashed its U.S. asset-backed CDO exposure to $4.5 billion as of June 30 from $6.7 billion at the end of the first quarter. It whittled its U.S. subprime exposure 29% to $1 billion, primarily because of $544 million in write-offs.
But Merrill and other investment banks are on the proverbial treadmill. As quickly as they're taking mortgage write-offs, the value of the underlying assets is deteriorating further.
The result is that the firms still have significant exposure to the most troubled areas of the mortgage-securities arena. And it's doubtful that Merrill and others can stop the bleeding -- or even accurately calculate how much bleeding they have left to do -- until the housing market stabilizes.
And we all know that hasn't happened yet.
Photo: Merrill CEO John Thain. Associated Press
Wall Street had its mojo working for a second straight session today.
Then came three buzz killers named Google, Microsoft and Merrill Lynch.
Another plunge in oil prices and some better-than-expected bank earnings reports fueled a powerful rally in the regular trading session, lifting the Dow Jones industrial average 207.38 points, or 1.8%, to 11,446.66.
That put the Dow’s two-day gain at 484 points, or 4.4%, after it hit a two-year low on Tuesday.
But after the closing bell, Google, Microsoft and Merrill each reported second-quarter earnings that failed to meet analysts’ estimates. Their stocks are being hammered in after-hours activity, with Google off $40 to $493, Microsoft down $1.60 to $25.92 and Merrill sliding $1.97 to $28.76.
 Everything had been going so well for Wall Street’s bulls. Crude oil in New York slumped $5.31 to $129.29 a barrel, the lowest price since June 5 and the third consecutive decline.
Banking giant JPMorgan Chase this morning reported quarterly results that were down but still came in above expectations. The stock zoomed $4.86, or 13.5%, to $40.80, leading a second day of frenzied buying of battered financial issues. Smaller banking firms PNC Financial Services and Huntington Bancshares also beat estimates.
The sudden turnaround in bank, brokerage and other financial stocks has squeezed so-called short sellers, traders who have been betting that the stocks would continue to slide. In a short sale a trader sells borrowed stock, expecting to replace it later with new shares bought for less.
So if a stock they’re targeting rises instead of falls, that’s a problem for short sellers: It triggers many of them to rush in to close out their bets. Their buying just drives prices higher. Check out East West Bancorp and Downey Financial today, both of which have been heavily shorted.
"The short-squeeze definitely added to the buying" today in financials, said Todd Leone, a trader at Cowen & Co. in New York. Even so, he said, "I think there’s real buying, too. These stocks have been absolutely devastated."
Anthony Conroy, head trader at BNY Convergex in New York, says many investors are reassessing financial stocks in the wake of the massive and indiscriminate selling in the sector since late May.
"There are some very solid companies that were getting hit for no reason," he said. "People are asking, 'How many babies got thrown out with the bathwater?' "
But Merrill Lynch’s quarterly results -- a net loss of $4.7 billion -- may revive fears that the financial system is a long way from recovery. And results from Google and Microsoft won’t help the mood at the next opening bell.
Then again, if the market can overcome that troika on Friday, the idea that stocks just scratched out their summer bottom may gain more currency.
Photo: Nothing wrong with this baby; back in the bath you go. Bob Carey / Los Angeles Times
Wall Street isn't expecting much in the way of earnings growth from most major companies in the quarter just ended. The question is whether even those subdued expectations are too high.
Second-quarter results will begin to roll out this week, and nobody's going to be surprised by the biggest winners or the biggest losers: Energy companies will rake it in, again, at everyone else's expense. Meanwhile, many banks and brokerages will remain deep in the red as losses continue to mount from the what-were-they-thinking loan practices of the last few years.
In between those extremes, the majority of the other 10 broad industry sectors in the Standard & Poor's 500 index are expected to post single-digit profit growth, at best, given the U.S. economy's struggles. After energy, the technology sector appears to have the strongest shot at double-digit growth -- which, if it comes true, may demonstrate that after gasoline, there is no higher priority for many companies and consumers worldwide than shelling out for the latest hardware and software upgrades.
Analysts already have taken a machete to their earnings estimates for the quarter: On April 1, the overall expectation for S&P 500 index operating-profit growth (earnings before one-time gains or losses) was for a decline of 2% in the period compared with a year earlier, according to Thomson Reuters, which compiles the data.
Now the overall S&P 500 estimate is for a drop of 12.4%. Analysts have further slashed their financial-company estimates since April 1, but they've also pared back estimates for eight of the other 10 S&P industry sectors. The energy sector, alone, has had its estimates raised, thanks to what we've all been paying at the pump and at the thermostat. Big Oil and its allied companies are expected to post a 28% jump in earnings, on average, even better than their 26% first-quarter growth.
Apart from the ravaged financial sector, the outlook also remains dismal for the so-called consumer discretionary sector, which includes home builders, automakers and restaurant chains, among other industries.
With the earnings-growth bar seemingly low for so many companies, it's easy to imagine some pleasant surprises in second-quarter results (remember: consumers were spending those tax rebate checks in the quarter, just not on houses or cars).
But better-than-expected earnings aren't worth much if a company's CEO accompanies them with a downbeat assessment of the near future. And there's likely to be a lot of caution in the outlook portion of the quarter's reports, given what $145-a-barrel oil is doing to the global economy.
These days, you have to figure that most of the truly confident CEOs are in the energy business -- and they're not about to tell us how they really feel.
The stock market looks like it dodged a couple of bullets today, but the modest rebound in the Dow Jones industrial average during the half-day session couldn’t salvage the week.
And take a guess which commodity closed at yet another record high.
The Dow added 73.03 points, or 0.6%, to 11,288.54, but lost 0.5% for the holiday-shortened week and stayed in bear-market territory, off 20.3% from its October peak.
 The broader market was much worse, for the day and the week. Investors continued to unload some of the stocks that held up best for them in the second quarter, particularly smaller issues. The Russell 2,000 small-stock index lost 1% today and 4.6% for the week, and is down 22.2% from its all-time high reached nearly a year ago.
The slow-motion crash in bank stocks also continued, suggesting no easing of the latest jitters over the financial system. On the new-lows list today yet again: Bank of America, Wachovia, Comerica, U.S. Bancorp and Zions Bancorp, among others.
The government’s report of a net loss of 62,000 jobs in the economy in June nearly matched expectations, so that was a relief to some on Wall Street.
Should it have been? The debate over whether we are, or aren’t, actually in a recession will go on, but to some analysts there’s no question anymore.
Merrill Lynch & Co.’s econo-bear, David Rosenberg, says the lesson from history is that "you don't have six consecutive monthly declines in payrolls and not be in an outright recession."
For stock investors, the issue is what the slowdown/recession/whatever will mean for corporate earnings. Analysts have a dismal view of results for the quarter just ended: Operating earnings of the S&P 500 companies are expected to be down 12.4% from a year earlier, according to Wall Street estimates tracked by Thomson Reuters.
Yet those same analysts still believe the second half will bring a big turnaround. They’re expecting a 12.7% year-over-year gain in S&P earnings in the third quarter. . . .
Read on »
Conspiracy theorists can run wild with this one: Just after the Dow Jones industrial average this morning crossed the classic bear-market threshold of a 20% decline from its record high, it rallied.
It wasn’t much of a rally, but it was enough to keep the Dow above the 20%-down mark. The blue-chip index finished the day at 11,346.51, off 106.91 points, or 0.9%. That left it down 19.9% from its record closing high of 14,164.53 reached Oct. 9.
At its intraday low of 11,298 today, the Dow was off 20.2% from its peak.
The mind reels: Does some Wall Street cabal of big market players want to make sure the Dow doesn’t fall into official bear territory and panic the masses?
Wait -- wouldn’t the cabal want to panic the masses, so it could pick up stocks cheap?
 Or maybe the cabal wants to keep the market from collapsing just long enough to unload its shares?
Is the Trilateral Commission somehow involved?
Just having a little sick fun here; you have to laugh to keep from crying in this market. To that end, check out this very entertaining picture-post.
As for the market backdrop today: Oil finished at another record high ($140.21 a barrel) and financial stocks again were hammered. That bad combo set the tone for another losing session, although the selling abated sharply compared with Thursday’s rout.
And as has been the case all month, blue-chip stocks were hit hardest today. Smaller stocks continued to fare much better than big stocks. And most market indexes, other than the Dow, still are above their March lows.
The question is whether the general (the Dow) is leading the rest of the troops into a certain massacre.
The Standard & Poor’s 500 fell 4.77 points, or 0.4%, to 1,278.38 today. It’s off 18.3% from its peak reached in October. The New York Stock Exchange composite, down 0.2% today, is off 16.4% from its record high, also set in October.
The Russell 2,000 small-stock index was off fractionally today to 698.14, and is down 18.4% from its record high reached last July.
Note, though, that the Russell was in bear-market territory in March. At its low that month, it was off almost 25% from its peak.
The Russell index’s relative resilience since March may be stoking hopes that if this is a bear market, it’s a kind of mild-tempered, Yogi-style bear -- not the grizzly that ate half the market value of the S&P 500 in 2000-02.
That last bear market, led by technology stocks, was fueled by a collapse of corporate earnings. Just what’s happening to the corporate bottom line this time around will be the market’s main focus in July, as second-quarter profit reports roll out.
How much more fun can investors stand?
Image: The one, the only . . . Yogi Bear. Hanna-Barbera Studios
Ralphs shoppers may lament the grocery chain’s new cutback on double-couponing, but the company’s parent today showed why the need for that particular promotional hook has lessened: Struggling consumers are coming through the doors for other reasons, including for cheaper store-brand goods -- and because they can't afford to eat out.
Kroger Co., which owns Ralphs, Kroger, Food 4 Less, Smith’s and other chains nationwide, reported quarterly earnings that beat expectations, sending its shares up 7% for the day.
Cincinnati-based Kroger told analysts during a conference call that it’s benefiting as more cash-strapped consumers turn to its less-expensive store-brand items in place of brand-name products.
What’s more, people apparently aren’t kidding when they say in consumer surveys that they’ve stopped going to restaurants.
Here’s what Kroger’s CEO, David Dillon, said on the call: "When we dissect some of our data and we look at our very best customers, [they] are buying both more Kroger brand and more national brand, not just more Kroger brand. And we believe that the way to read that is that there’s of course a shift from restaurants and other places to buying more food in our stores. We think there’s a shift to preparing food at home more."
That trend helped drive Kroger’s earnings to $386 million, or 58 cents a share, in the quarter ended May 24, up 15% from a year earlier. Sales jumped 11% to $23.1 billion. Analysts had expected profit of 55 cents a share.
The company said it expected full-year profit to be up as much as 12% from 2007. And in an economy where many companies will be hard-pressed to show much or any profit growth this year, Kroger’s double-digit promise rang Wall Street’s bell: The stock jumped $1.82, or 7%, to $27.82. It’s now up 4.2% this year, compared with a drop of 10.5% for the Standard & Poor’s 500 stock index.
No more wondering why stocks are back in a funk: It’s because the people who invest the big money now have a truly dismal view of the equity market’s prospects.
That’s the takeaway from Merrill Lynch & Co.’s latest monthly survey of about 200 professional fund managers worldwide who control more than $700 billion in assets.
 The June survey, conducted the 6th through the 12th, indicates that the risk of stagflation -- rising inflation, rising interest rates and weak economic growth -- "is beginning to create a major headwind for equities," Merrill says.
Fund managers "have reacted to this unpalatable combination by reducing their exposure to equities and raising their cash positions."
Three numbers from the survey show just how dramatically investors’ perceptions have shifted:
-- The net percentage of managers who say they now are "underweight" in stocks (meaning they’ve cut back much more than normal in asset-allocation portfolios) jumped to 27% from just 5% in May. The June reading is the most bearish in a decade of survey results, Merrill says.
-- The net balance of managers who believe stocks to be "undervalued" plunged to just 1%. It had been 25% in the March survey. "This seems consistent with a world where growth is set to disappoint and where both long- and short-term interest rates are expected to rise on the back of inflation concerns," Merrill notes.
-- A net 81% of managers believe that analysts’ consensus corporate earnings estimates for the next 12 months are too high.
Is there a silver lining here? We all know that it’s often precisely when the crowd is at its most pessimistic about stocks that the market is likely to rally.
But that isn’t always true. Sometimes, the crowd is right, at least for a while -- if for no other reason than that investors, by engaging in group-think selling, can make a bear market a self-fulfilling prophecy.
Photo: Edvard Munch's Expressionist masterpiece "The Scream." Solum, Stian Lysberg/AFP/Getty Images
From Times staff writer Walter Hamilton:
Goldman Sachs Group gave to the market with one hand this morning -- and took away with the other.
The brokerage and investment banking titan comforted investors early on by reporting much-better-than-expected fiscal second-quarter earnings. That helped ease some of the fresh concern about the financial sector triggered last week by Lehman Bros. Holdings Inc.’s warning of a huge quarterly loss.
But later in the morning a team of Goldman analysts helped spark another sell-off in financial shares with a gloomy report on commercial banks. The analysts predicted that banks may have to raise another $65 billion in capital this year to rebuild their balance sheets amid the ongoing stream of credit-related write-downs.
Regional bank stocks are taking another sharp hit today, led by Salt Lake City-based Zions Bancorp, which warned of rising loan problems tied to the housing market’s woes in the Southwest. Zions shares were down $3.37, or 9.1%, to $33.79 at about 11:45 a.m. PDT.
The BKX index of 24 bank stocks is at yet another multiyear low, extending its year-to-date decline to nearly 26%. After rallying in April, many bank stocks have since crumbled as investors have reassessed the potential for worsening loan losses.
 Goldman held out little hope for a snap-back in the stocks soon. "We believe that a broad-based rally in bank shares is unlikely in coming months," analyst Richard Ramsden wrote.
Meanwhile, if there’s to be a survivor in the financial sector overall after this mess, Goldman is the likely candidate. The company’s profit in the quarter ended May 30 was down 11% from a year earlier but still handily beat analysts’ estimates -- a tribute to the breadth of the firm’s businesses.
Goldman reported net income of $2.09 billion, or $4.58 a share, compared with $2.33 billion, or $4.93 a year ago. Analysts had expected $3.42 a share. Revenue totaled $9.42 billion in the latest quarter, down 7% from $10.2 billion a year earlier.
Reflecting the upheaval in markets from the credit crunch, Goldman’s fixed-income and investment banking results were weak. But that was offset by strength in commodities trading, asset management and prime brokerage.
Goldman’s shares were about flat at 11:45 a.m. PDT, at $181.08, while the broader market was lower. The stock is down 27% its its record high of $247.92 reached on Oct. 31, but that’s minor compared with how most brokerage issues have collapsed.
And Goldman’s chief executive, Lloyd Blankfein, isn’t shy about reminding Wall Street that as the weak get weaker, the financial business is a veritable smorgasbord for strong predators.
"We are realistic about the market challenges we face, but times of dislocation also produce opportunities and we will continue to take advantage of the most attractive of these as they arise," he said in a statement.
Photo: Lloyd Blankfein. Suzanne Plunkett/Bloomberg News
General Electric Co. is having a hard time keeping friends on Wall Street. It lost another one on Monday, driving the widely owned shares to a new multiyear low.
C. Stephen Tusa Jr., who follows GE for JPMorgan Securities, cut his rating on the stock to "neutral" (i.e., "hold") from "overweight" ("buy"), saying the company faces too many near-term challenges -- including senior management's damaged credibility and the possibility that lower-level managers won't be willing to tell their hard-driving bosses the truth about things.
 Tusa had been recommending the stock since at least mid-2004. "We have been wrong," he conceded in a new report.
His rating cut on GE, as he pared his 2009 earnings estimate, helped send the shares to a 4 1/2-year closing low of $28.97, down 18 cents.
Tusa repeated his call for the once-esteemed conglomerate to jettison more of its far-flung businesses to make the company a simpler idea for investors to digest.
Pressure on GE to restructure has been intense since the company on April 11 dropped an earnings bomb on Wall Street, reporting a first-quarter profit that was 14% shy of analysts' estimates.
GE's huge financial services business has been a drag on the bottom line amid Wall Street's credit nightmare, but the first-quarter earnings shortfall also reflected disappointing results in the company's industrial, healthcare and infrastructure units.
Chief Executive Jeffrey Immelt last month announced plans to sell the company's appliance arm, a step that Tusa sees as leading to a more dramatic remake of GE's wide-ranging business mix (which spans broadcasting, aircraft engines, commercial real estate lending and a lot more in between).
Without a significant corporate reshuffling, "Even if results improve, investors are going to have a hard time believing they are sustainable," Tusa said in his report.
In the meantime, I was intrigued by Tusa's warning that GE's managers might go too far in trying to make their numbers after the first-quarter debacle. Never underestimate what a ravaged stock price will do to the corporate psyche, after all.
"Based on recent developments, it would appear as though accountability for hitting targets is the top priority, and some managers might be chasing earnings," Tusa wrote.
"We also think the high bar for success in such a competitive environment could create a scenario in which bad news is not tolerated, making necessary communication with senior-level managers a challenge until it's too late to fix."
Somebody stole away 99 Cents Only Stores Inc.’s quarterly profit -- literally.
The City of Commerce discount retailer said Wednesday that it lost $4.4 million, or 6 cents a share, in the fiscal fourth quarter ended March 29 because of an unexpected jump in thefts at some of its stores.
So-called shrink expenses -- losses tied to an unplanned drop in product inventories -- were $5.5 million greater than the company had expected for the quarter, Chief Executive Eric Schiffer said in a conference call with analysts and investors.
He said the firm believed that "unexpected theft-related shrink is largely responsible" for the jump in overall shrink costs, which also can stem from spoiled or scrapped goods.
Analysts had expected a modest profit in the latest quarter, betting that the company’s bargain-priced food and general merchandise would attract more consumers who are struggling to cope with the surge in gasoline prices this year.
 The surprise loss triggered a sell-off in the retailer’s shares in after-hours trading: The stock fell to $7.20, after rising 27 cents to $7.89 in regular trading.
99 Cents Only Stores, founded in 1982 by David Gold, pioneered the single-price retail concept. Everything in the now 265-store chain is priced at 99 cents or less.
If you’ve been in a store, or even driven by one, you know what the merchandise mix looks like. It’s a lot of day-to-day stuff you may need -- and a lot of stuff that fits some people's definition of junk.
Sales totaled $1.2 billion in the last fiscal year, $290 million of it in the last quarter. But the company’s earnings picture has dimmed since 2003, and management has struggled with accounting troubles that have strained its credibility with Wall Street.
With the sudden surge in theft losses, "It’s a management credibility issue again," said Joan Storms, who follows the company for Wedbush Morgan Securities in L.A.
Schiffer said on the conference call that the company believed that the theft troubles were "fixable." He and other executives said the losses were concentrated in 29 stores, and that "a lot of them, not all, but a lot of them are in one geographic area."
Where? Schiffer wouldn’t say, except that "it’s not Los Angeles." The company has stores across California and in Arizona, Nevada and Texas.
As for the culprits, the company wasn’t specific in the conference call about whether the thefts were believed to be primarily by customers or by employees. But it sounded like an inside job. At one point during the call, Schiffer appeared to provide a motive for insiders.
"It’s well known throughout the company that we are in the process of taking our existing management and putting them through training, upgrading the staff out there," he said.
"And we always say that we hope all of them are able to make the transition. I don’t know the effect on people who think that they may not be able to make the transition during these current economic times."
That conjures visions of pallets stacked with shampoo, candy and tchotchkes heading out the back door.
Schiffer and other executives tried to put the best face on the quarter’s results, noting that sales at stores open at least one year were up 1.5% -- the 10th consecutive quarterly increase -- even as some retailers have reported lower sales.
In theory, 99 Cents Only ought to be packing in the customers as consumers' incomes are squeezed in a tough economy.
Now if they could only control what’s being packed out of the stores.
Photo: Patrons shop for fresh produce at a 99 Cents Only store in Los Angeles in March. Stefano Paltera/Los Angeles Times
From Times staff writer Walter Hamilton:
Wall Street has been worried for weeks that Lehman Bros. was facing another hit from the credit crisis.
Turns out the market wasn’t worried enough.
The securities firm pulled back the curtain on its fiscal second-quarter results today, and the numbers were worse than even the most bearish estimates.
Lehman said it expected to lose $2.8 billion, or $5.14 a share, in the quarter ended May 31, far more than analysts’ forecasts. The company also said it was raising $6 billion in fresh capital -- $2 billion more than projected.
The loss estimate and the looming dilution from the capital injection sent investors crowding for the exits. The stock was off $4.27, or 13.2%, to $28.02 -- a five-year low -- at about 11:30 a.m. PDT. Lehman's numbers were weighing on financial stocks in general, which are having another bad day.
"Today’s results were far worse than anyone had anticipated," Goldman Sachs & Co. analyst William Tanona wrote in a note to clients.
 Lehman CEO Richard Fuld Jr. at least acknowledged the obvious, calling the company's first-ever quarterly loss "very disappointing."
Lehman said the red ink would stem from more write-downs of securities it holds and from trading losses.
The company tried to show that it had made some progress with its troubled investment portfolio. It cut its exposure to risky residential and commercial mortgages by as much as 20% in the quarter.
Lehman also said it sharply boosted liquidity -- basically, cash on hand to prevent a Bear-Stearns-like run on the bank -- to $45 billion from $34 billion at the end of the first quarter.
But investors’ concern is that Lehman had appeared to be weathering the credit crisis in the first quarter, only to divulge this latest round of write-downs. The company had turned a profit of $489 million in its fiscal first quarter.
To bolster its balance sheet, Lehman said it was raising $4 billion by selling 143 million shares of common stock at $28 each, which will boost outstanding shares by 26%. It’s also selling $2 billion of preferred shares that will pay an 8.75% annual dividend yield.
Tanona said he had expected investors’ reaction to be negative "given the size of the loss and the book value deterioration."
But he also noted that many "short sellers" had been targeting the stock, selling it in recent months in anticipation of more trouble. The short position in Lehman has ballooned to 76 million shares from 56 million at the end of March.
"We would expect the stock to move higher throughout the day as we believe you will see some investors covering their short positions," Tanona said.
So far, though, no sign of that.
Photo: Lehman Bros. CEO Richard Fuld Jr. Virginia Mayo/Associated Press
On a good day for most financial stocks, IndyMac Bancorp shares finished at a new 18-year closing low after the company’s first-quarter loss report and conference call with analysts -- despite CEO Michael Perry’s continuing efforts to paint the Pasadena-based mortgage lender as a survivor.
The stock slid 37 cents to $3.06, below the previous closing low of $3.25 on April 30.
 Frustrated investors in the stock may be tempted to blame short sellers -- traders who borrow stock and sell it, betting on falling prices. The shorts have targeted IndyMac over the last year, and they may be jumping on it again. But if so, that would be a switch from the last few months: The total number of shorted shares was 34.8 million as of April 30, down from 41.9 million at the end of February, according to New York Stock Exchange data. Looks like the shorts have been getting bored with this one.
Some analysts have raised questions about losses the company could face on now-troubled loans it previously sold to investors, if those buyers try to renege by arguing that IndyMac failed to properly vet the loans.
Perry, asked about put-backs on today’s conference call with analysts, said he expected them to increase. "You know, clearly it is one of those environments where you don’t know for certain how that’s all going to work its way out. You are going to have investors trying to ask you to repurchase more loans. I mean, that is just the way it is," he said.
He also indicated that IndyMac would go to the mat with investors. The loan-evaluation team for potential put-backs is headed by Richard Wohl, the bank’s president and "a Harvard lawyer," Perry reminded analysts. "They have got a strong team in that area really looking through each one of these loans, making sure the reason that the loss has been incurred is something that we did wrong as opposed to the housing market just declining."
Of course, it's likely the investors employ some Harvard-educated lawyers as well.
Photo: Nick Ut/Associated Press
Wall Street’s reaction to quarterly financial reports from home builder Standard Pacific Corp. and mortgage lender IndyMac Bancorp this morning: Sell first, ask questions later.
Shares of Irvine-based Standard Pacific slid as low as $2.72 from $3.77 on Friday after the firm said its first-quarter loss ballooned to $216 million, or $3.34 a share, far exceeding analysts’ estimates. Read the report here. The company also said it’s working with its lenders to extend an easing of restrictions on its finances and hopes to have a final agreement by Wednesday.
The average home sale price across all of Standard Pacific’s markets was $347,000 in the quarter, down 10% from a year earlier, because of "the level of incentives and discounts and price-cutting required to sell homes," the company said.
By contrast, the average selling price was $406,000 in the fourth quarter, down 3% from a year earlier.
Pasadena-based IndyMac's shares fell as low as $3.08, from $3.43 on Friday, after the company said it lost $184 million, or $2.27 a share, in the quarter, also worse than analysts had expected. The report is here.
Although IndyMac reiterated its recent forecast that losses should grow smaller as the year progresses, CEO Michael Perry warned that "we do not expect that IndyMac will be able to return to overall profitability until the current decline in home prices decelerates."
Based on Standard Pacific’s selling experience, the hoped-for "deceleration" of price declines still looks to be somewhere on the far horizon.
Times staff writer Walter Hamilton filed this report on the first-quarter earnings picture:
As earnings-reporting season winds down, the numbers aren't pretty. But considering that the economy may be in a recession, it could be worse.
For the first quarter, S&P 500 profits thus far have tumbled 17.4% from last year, according to Thomson Reuters.
Although that’s horrible, the number is skewed by the disastrous performance of the financial sector, which is off a jaw-dropping 79%.
Excluding financials, profits actually would be up 7.1%, according to Thomson Reuters. And even discounting the first-quarter’s best-performing sector -- energy, with a 26% rise -- earnings still would eke out a 2.8% gain.
That’s far from stellar, but doesn’t suggest an economy that’s headed for deep trouble.
With about 90% of companies having reported so far, 62% have beaten estimates, according to Thomson Reuters. That’s in line with historical standards. But 28% of companies have missed their numbers, far more than the 20% historical average.
Financial companies are the primary offenders -- with American International Group last week becoming the latest financial behemoth to drop an earnings bomb on shareholders in the form of a large unexpected write-off.
“It seems the [financial] companies themselves don’t have a strong grasp” of their earnings picture, said John Butters, director of U.S. earnings research at Thomson Reuters.
Where do we go from here? Wall Street soothsayers expect S&P 500 earnings to droop 5.9% this quarter -- then perk up significantly in the second half of the year.
In part thanks to easy comparisons, they're looking for profits to jump 17.3% in the third quarter and a whopping 64.1% in the fourth.
It seems that analysts are drinking from the same punchbowl as Wall Street’s most bullish investors: They’re betting on stimulus from government tax rebates and the Federal Reserve’s interest rate cuts to stir the economy.
From Times staff writer Martin Zimmerman:
Times are tough in the U.S. auto market. Just ask Toyota.
The Japanese automaker, in a race with General Motors to be the world’s largest car company, reported lower-than-expected earnings for its fiscal fourth quarter today as a strong yen and weak U.S. sales took their toll.
Worse, the company said it expects its profit to fall 27% this year and forecast a 5% drop in annual sales — its first in nine years.
The results prompted Toyota President Katsuaki Watanabe to promise to look for ways to cut costs.
“We are facing a severe business environment,” Watanabe said in a statement. “However, Toyota considers this headwind as a valuable opportunity to turn it into a more flexible and stronger company.”
Investors weren’t pleased. Toyota’s New York-traded shares slid more than 5% on the news before recovering a bit.
“It tells you that the slowdown [in the U.S. auto market] is not limited just to domestic brands, said Efraim Levy, industry analyst at Standard & Poor’s. “Even the Japanese brands are not unscathed.” Levy cut his rating on Toyota today from “buy” to “hold” and lowered his 12-month price target on its stock to $108 a share from $121.
U.S. light vehicle sales, which include cars, pickups and SUVs, are down almost 8% this year through April. Levy is forecasting 2008 industry sales of 15.1 million vehicles in the U.S., 1 million fewer than last year.
Toyota (along with fellow Japanese automakers Nissan and Honda) bucked the trend by notching sales gains last month. But much of those gains came in small, fuel-efficient cars, which typically provide much thinner profits than big pickups and SUVs.
That calculus has been especially painful for the Detroit Three, which are more dependent than Toyota on trucks and SUVs. High pump prices have dramatically slowed sales of gas guzzlers, and all three U.S. automakers suffered double-digit sales declines last month.
“It’s a double whammy — lower volume and lower margins,” Levy said.
Like its American counterparts, Toyota reported strong results in non-U.S. markets. But North America accounts for about half of Toyota’s operating profit and a third of its sales.
Besides high gas prices, the decline in U.S. sales is tied to the slump in the housing industry, which has been especially damaging to pickup sales, and to general worries about economic weakness and job losses.
Toyota is under additional pressure from a strong yen, which is now trading at 103 to the dollar compared to around 120 a year ago. That drives up the cost of imports. Although Toyota produces a significant percentage of its vehicles at North American factories, it still imports a significant percentage of its vehicles from Japan — including the Prius hybrid, which has been a big seller this year.
Rising raw material prices are also taking a toll, especially for steel, analysts said.
Toyota reported a net profit for its fiscal fourth quarter ended in March of 316.8 billion yen ($3.05 billion). That was down 28% from a year ago and the company’s first quarterly profit drop in almost three years. Sales rose 3.8% to 6.567 trillion yen ($63.14 billion).
Money & Co. blogger Tom Petruno is on vacation this week. He returns May 12.
Times staff writer Edward Silver, who keeps a close eye on green investing trends, filed this report on solar-module maker First Solar Inc.'s earnings report today:
First Solar thinks different, and that’s why its stock is in a class by itself in the renewable-energy field. Though it’s a young company in an emerging industry, it has become a profit machine, a status burnished by its first-quarter results.
Today it reported earnings of 57 cents a share, outdoing consensus estimates by a dime. Revenue of $196.9 million was triple the year-earlier sum. Taking the new numbers into account, analyst John Hardy of American Technology Research believes First Solar is likely to earn $2.82 a share this year.
 With the stock around $300 -- it closed at $291.99 but spiked to $307.80 in early trading -- that still implies a rich price-to-earnings ratio. But the equation loses its outlandish tinge when you consider that First Solar is building plants fast to satisfy demand that may swell next year’s profit up to $7 a share.
First Solar is living large on "thin film," a next-generation method that accounts for perhaps 10% of the industry’s installations. Silicon-based cells claim the rest. Thin-film products are flexible, lighter and above all, dodge the inflated price of silicon, which has been on a tear. But the standard material converts sunlight into energy more efficiently, and the intricacies of thin-film chemistry and manufacturing have been known to hamper companies trying to get off the ground.
Even within the thin-film brigade, however, First Solar goes it alone. Its formula relies on tellurium, one of the rarest elements on the planet. Long-term supply is secure, the firm says, and all else seems to be going right too. Its much-admired manufacturing is said to be so cost-effective that some see it leading the charge to bring solar into coal’s price range. That’s a goal dear to the hearts of both environmentalists and investors.
Enough background? Here’s what’s new. The company is headquartered in Phoenix but its business is anchored in Europe. On today’s conference call with analysts, however, CEO Michael Ahearn spoke of a high sense of urgency among U.S. utilities to meet their renewable-energy mandates. Already, First Solar is developing a 7.5-megawatt pilot project with Southern California Edison. Look homeward, Ahearn?
Hardy, the analyst, calls First Solar the most capable provider for utility-scale projects. Starting in the latter half of 2009, "We see the U.S. utility market as the primary driver of demand, based on the fact, of course, that the U.S. consumes so much of the world’s electricity."
The question is, are the blue skies already priced into the company's $23-billion valuation? First Solar investors know they own a volatile stock, one that has almost doubled from its February depths of $165.60. Wall Street pays well for speedy growth, but at these heights the risks are magnified.
A few to keep in mind: What if silicon prices slide as supply rises, and potential thin-f | |
