Trader Talk

Cuts In Bank Earnings Hurting Market


Here are my midday observations:

1) One reason the market has little upside todayis strategists and analysts are now realizing the effect that cuts in bank earnings are having on overall profit projections for the third quarter. A week ago, analysts were expecting the S&P 500 earnings to growth 3.9% in the third quarter, today it is cut in half, to 2.0%. What happened? Citi's huge cut in estimates--it's the fifth biggest stock in the S&P 500 (KB Home also had a small effect).

2) Are investors finally waking up to the U.S. rally? According to TrimTabs, U.S. equity funds had inflows of $ 4 billion for the week ending Monday. Doesn't sound like much, but consider that in September there was only $10 billion in inflows, most of it on the day after the Fed cut rates. From May to August, there were OUTFLOWS of $30 billion.

3) Looks like the more the market goes up, the less enthusiastic hedge fund managers are. Greenwich Alternative Investments reports that only 8% of the macro hedge fund managers it surveyed expect the S&P 500 to rise in October. According to TrimTabs, that is the lowest level of bullishness is since the survey's inception in January 2004.

4) Deutsche Bank is following the same strategy that Citi and UBS has pursued. Deutsche Bank has pre-announced preliminary 3Q07 results; profits are well below consensus, just as Citi's was. But by announcing losses greater than expected they are contributing to the same "kitchen sink" mentality that helped Citi and UBS yesterday; be conservative (take larger writeoffs than expected) and hope to start the year on a clean slate. Deutsche Bank up 2.1%.

They are maintaining an optimistic stance, talking about "substantial opportunities in investment banking after this period of correction." They are sticking to their 2008 earnings targets because of robust earnings in other business areas, capital gains, and tax benefits.

Here is a good example of what the bulls have been saying about the nature of global banks: their revenues and profits are increasingly diversified, so that losses--even significant losses in one area (in this case, investment banking), are offset by gains elsewhere.

Questions?  Comments?