Financials Lead Rally; Lehman Jumps 10%
Stocks kicked off the second quarter with a rally Tuesday, led by financials, after Lehman Brothers announced plans to raise more capital and two European banks disclosed write-downs.
Lehman Brothers shares rocketed Tuesday after the investment bank made its boldest move yet to stave off short sellers looking to make it another Bear Stearns, announcing that it has sold $4 billion of convertible preferred sharesin an already oversubscribed offering.
The market's response wasn't so much about another bank raising money, analysts said, it was the terms of the offering that provided an endorsment of the bank's financial situation. The shares were priced with a dividend yield of 7.25 percent and at a 33 percent premuim to the stock's closing price Monday. And, the deal is already done -- the shares are already sold.
Punk Ziegel, which has a "buy" rating on Lehman stock, cut its price target to $46 from $51 and lowered its 2008 earnings forecast for the firm to $3.87 from $4.30 a share.
"There's been such negative sentiment on the brokers. Everyone is searching for what is going to be the bottom. Each additional card that's played leads one step closer," Mark Schlarbaum, a trader at Global Capital Management in Conshohocken, Penn., told Reuters. "Financials are cheap right now, and if investors can get comfortable that they are near or at a bottom, they can start putting money to work in the sector."
The Lehman news started the market off on the right foot Tuesday but a better-than-expected reading on the manufacturing sector propelled stocks even higher.
The Institute for Supply Management reported that its purchasing managers' index unexpectedly roseto 48.6 in March from 48.3 in February. However, the sub-50 reading points to contraction for a second straight month and new orders were the lowest since October 2001.
A separate report showed that construction spending fell 0.3 percent, less than expected, in February, marking the fifth straight month of decline. Economists had expected a 1 percent decline, the same as January.
Before the opening bell in the U.S., news of more write-downs from European banks offered hope that the end is in sightfor the global credit crunch.
Swiss bank UBS , the hardest hit by the credit crunch in Europe, announced it will write down another $19 billion because of exposure to risky assets, bringing its total to $33 billion in write-downs since October 2007. UBS also said it was planning to raise 15 billion Swiss francs ($15.03 billion) through a rights issue, underwritten by a syndicate of banks led by JP Morgan, Morgan Stanley, BNP Paribas and Goldman Sachs.
"We're taking comfort in the fact that there are actually four banks that are willing to support UBS," Ralph Silva, research director at Towergroup, told CNBC's "Worldwide Exchange."
"Why would you not want to buy into UBS at a discount? They are counting on UBS coming back from this," Silva said, adding that the Swiss bank had to make "significant changes" just to survive in the coming months.
Deutsche Bank made an unexpected announcement for 2.5 billion euros ($3.9 billion) in write-downs, saying market conditions had deterioriated significantly in recent weeks.
Goldman Sachs lowered its forecast for Citigroup and Merrill Lynch, saying it expects significant write-downs for both firms amid deterioration in credit and equity markets. Goldman now expects Citi to post a loss of $1.55 a share amid write-downs of $12 billion, and pegs Merrill's loss at $2.45 a share on write-downs of $2 billion.
Morgan Stanley issued a note saying that investment banks are taking their worst hit to earnings in 20 years and that long-term returns on equities will suffer amid de-leveraging and tighter regulations on banks that will require them to hold more cash reserves to guard against future problems.
Semiconductors also gave the market a boost, with the Philadelphia Stock Exchange semiconductor index up more than 3 percent. Among the sector's biggest gainers were Sandisk and Infineon Technologies .
Microsoft sees no reason to increase its bid for Yahoo, sources told Reuters, amid increasing speculation that the software giant would increase its $44.6 billion offer.
IBM is under investigation by the U.S. Environmental Protection Agency over an $80 million bid it made in 2006 to modernize EPA financial systems and has been suspended from seeking new contracts with all U.S. agencies.
And Dell said it will save as much as $3 billion over the next three years as it cuts costs and lays off workers.
U.S. auto makers General Motors and Ford are slated to release their March sales figures later today.
Stocks rallied to close the quarter Monday, with all three major indexes -- the Dow Jones Industrial Average, S&P 500 index and Nasdaq -- finishing higher. But losses in the past few weeks left the Dow and S&P off slightly for the month. The Nasdaq eked out a 0.3 percent gain for March, snapping a five-month losing streak. For the quarter, the Dow ended down 7.6 percent, the S&P shed 10 percent and the Nasdaq was off 14 percent.
-- Reuters contributed to this article.
MONDAY: End of first quarter
TUESDAY: Auto sales; ISM manufacturing index; construction spending
WEDNESDAY: MBA applications; factory orders; oil inventories; Bernanke testifies; Earnings from Monsanto, Best Buy, Research In Motion
THURSDAY:Jobless claims; ISM services index; Fed's Yellen speaks
FRIDAY: Jobs report
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