Stocks Friday face an uphill battle after the worst two-day sell off for the Dow in more than six months.
The market took a pounding Thursday as President Obama unveiled a proposal to limit bank risk taking, raising concerns about the industry's profitability and even the very ability of the market to sustain its rally. Financial stocks, key drivers of the market's 10-month run, fell nearly 3 percent on the announcement, but the big banks, most affected by the proposals, fell considerably harder.
J.P. Morgan was down 6.7 percent; Bank of America fell 6.3 percent and Goldman Sachs fell 4.1 percent. Even CME Group saw its shares dive nearly 6 percent as investors worried the rule change would reduce volume on the futures exchange if the major institutions pull back from the capital markets.
The Dow was off 2 percent, or 213 to 10,389, its biggest one day drop since Oct. 30. It is down 3.1 percent in the past two sessions. The S&P 500 fell 1.9 percent, or 21 points, to 1116.
Even good earnings news did not make a difference Thursday, and a recent "sell the news" mentality continues to infect stocks that report earnings beats. Google, often a bright spot on earnings day, reported better than expected results but saw its shares get scorched in after hours trading.
Google revenue grew by 17 percent to $6.67 billion but it was short of some of the more bullish forecasts. Its earnings per share for the quarter was $6.79, well above the expected $6.48. According to Birinyi Associates, Google has beaten estimates 78 percent of the time and it typically then trades higher on earnings news.
American Express also beat on the bottom line, reporting profits of $0.59, better than the expected $0.55 per share. But American Express shares slid as its $6.5 billion revenues failed to show improvement over last year's level.
There are no economic reports of note, but there is plenty of earnings news on tap for Friday's market.
"It's all up to GE and Google," said Steve Massocca, managing director with Wedbush Securities. General Electric, which owns CNBC, reports fourth quarter earnings ahead of the opening bell. Other earnings reports expected Friday morning include McDonald's, Schlumberger, Kimberly-Clark and Air Products. Several regional banks, BB&T, Huntington Bancshares and SunTrust also report.
Massocca said the S&P came within striking distance of its 50-day moving average Thursday, at 1114.68. "If we could hold the 50-day, we're going to bounce," he said, adding deeper selling could be in the cards if it breaks that mark in a major way. "We're kind of right here, right now," he said.
China also continues to play a role in the selling. Earlier in the week, concerns China would tighten bank lending sent stocks and commodities spiraling lower around the globe. That sell off continued Thursday. Oil fell 2.1 percent to $76.08, while gold declined 0.9 percent to $1102.70 per ounce. The S&P materials sector was the worst performing sector, down 4.3 percent Thursday.
"The one thing that will make this market go down is if there's a legitimate threat to what they're doing in Washington, which is pouring sugar water down everyone's throat as fast as they can," said Massocca.
Massocca, and other traders, say the surprise win this week by Republican Scott Brown in the Massachusetts Senate race could be a signal that the days of heavy deficit spending may be nearing an end. "It's a movement...if you're a Democrat politician in a moderate district, are you going to keep voting for the next Obama stimulus plan?" he said.
Banking On It
After the initial shock, the question for the banking industry is what type of regulation will ultimately be adopted. RBC analyst Gerard Cassidy said he does not believe Congress will approve the Obama plan, as presented. Obama said he wants to toughen limits on the size of financial firms, and would limit proprietary trading activities and the institutions' ability to own hedge funds or private equity.
The Administration just last week imposed a new tax on financial institutions in an effort to make up money lost in the Troubled Asset Relief Program. The tax has been criticized by some as a punitive effort, more aimed at slapping Wall Street for its rich bonus schemes than recovering the TARP funds. The government, in fact, is not expected to lose money on its loans to the banking industry.
Rep. Barney Frank, who chairs the House Financial Services Committee, said on "Street Signs" Thursday afternoon that he would prefer the Obama plan to be implemented over three to five years. He said he supports Obama's efforts to limits the size of banks but would not want to see the banks forced into a fire sale of assets.
Cassidy said the Obama plan would make U.S. banks less competitive internationally and less competitive against the foreign banks doing business in he U.S. "We're going to get some type of bank regulatory reform, but this is onerous," he said.
The analyst said the traditional regional banks make 70 percent of their revenues from lending, while the major institutions make about 50 percent from lending. J.P. Morgan, for instance, received about 15 percent of its $109 billion revenues last year from the types of businesses targeted by President Obama. It's not clear how much of those revenues would have been directly impacted by the new rules.
CNBC's Steve Liesman reports that a little noticed amendment adopted by the House in November would allow regulators to take such action against the banks.
The Kanjorski amendment would "empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system."
As the major bank stocks sank, regional banks continued to rally, scoring double digit gains since the start of the year. Stocks like Keycorp, SunTrust and BB&T were all higher.
"The two driving forces behind it is the fact that investors are figuring out and becoming more comfortable with the fact that the worst of the credit problems are behind us. We're seeing that because the non performing asset formation is beginning to stabilize..The second big news item is that the banking industry continues to benefit from the steep yield curve as we see the interest margins expand," Cassidy said.
As stocks and other risk assets have fallen, the dollar has gained strength. The euro touched a low of $1.4070 Thursday, and was at $1.4105 in late trading.
"I think we're still in a dollar strengthening trend," said Deutsche Bank currency strategist Adam Boyton. "If we jump back to the end of the year, the dollar was particularly undervalued and particularly oversold. If we trace an average sort of correction, it points to euro dollar getting to $1.30 by the middle of the year."
Concerns about Greece's ability to finance its deficit have been a factor in the euro's decline. "The situation in Greece is keeping a bit of pressure on the euro. I don't subscribe to the suggestion that it would cause the euro single currency to break up," Boyton said.
"On top of that, there's just a general indication that the U.S. is going to bounce back more rapidly than Europe," he said.
Boyton said he also expects China's growth to slow this year, and the gap between Chinese growth and U.S. growth should narrow. That should impact currencies, such as the Australian dollar, which have been rising in tandem with China's growth. China reported Thursday that its year over year GDP grew by 10.7.
"The surprise is going to be U.S. upside..The way I'd be thinking about that in the currency market is which are tied to China..One of may favorite trades this year is selling Aussie dollar and buying Canadian dollars, " he said.
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