Trader Talk

Spain Bailout When, Not If; Can Banks Perform in Fourth Quarter?

Philippe Huguen

For a second day, S&P 500 index futures rose the minute Europe opened.

Spanish bailout request: when, not if. Now that the Spanish budget has been submitted and a review of its banks capitalization needs is completed, everyone is anticipating Spain will make a formal bailout request. The Germans, reportedly, are not eager to go back to Parliament to request more aid after a 100 billion euro ($128 billion) bank bailout was approved. (Read More: Rajoy Comments Spark New Spain Bailout Confusion.)

Regardless: Most market participants are only trying to guess the date, not whether a request will happen. The European Union's permanent rescue fund, the European Stability Mechanism (ESM), will be in place as of Oct 8. That is also the date for the first ESM board meeting. Beyond that, there is a EU leader Summit on Oct. 18-19, which might also be the right moment to submit a request.

What I am waiting for is details on this so-called "bad bank," which is being set up to take all the toxic real estate assets and will likely become the largest owner of real estate in Spain. We may get details on the bank this week. More later.

Bank earnings: Fourth quarter is critical. We are only two weeks away from the start of bank earnings season, but it's not the third quarter that is the focus, it's the fourth quarter. A lot is riding on a better quarter for U.S. banks ... analysts are expecting fourth-quarter earnings to increase better than 20 percent compared to the same period last year.

That is a good part of the total S&P 500 index profits for the quarter. My point: A big disappointment with banks will dramatically bring down total S&P 500 earnings for the quarter — and the year. Full-year profits for the S&P 500 are already down to about 4 percent ... still growth, but nothing like we have seen in the past two years.

The good news for banks: mortgages. The U.S. Federal Reserve has announced an aggressive program to buy mortgage-backed securities, and banks have plenty of those. Prices are going up, and banks are able to sell those loans into securitization programs at a hefty profit.

And with a modest housing recovering, some banks are clearly poised to benefit more than others. Yesterday Morgan Stanley moved SunTrust Banks and First Horizon to “overweight” because of their heavy exposure to housing. They already have an “overweight” rating on Wells Fargo, also heavily exposed to housing and mortgages. (Read More: 10 Bank Stock Earnings to Watch.)

The bad news: Economic activity is still weak, commercial loan growth still relatively anemic, and a flatter yield curve continues to put pressure on net interest margins (NIM) — the difference between the interest they are earning and the interest they are paying to their depositors.

Most traders think the risk is for downside earnings revision for the fourth quarter.

Here's the biggest problem: stock price run-ups. Everyone knows credit is improving, and many have been playing a housing recovery for months. Some of the biggest banks have had great run-ups this year: Bank of America up 65 percent; SunTrust up 60 percent; Wells Fargo up 25 percent; and BB&T up 32 percent. Deutsche Bank downgraded Wells Fargo and BB&T today on those gains.


1) Express is set to open at an all-time low, falling 17.7 percent pre-market, after the retailer slashed its third-quarter outlook due to an “abrupt” change in store traffic in September. Express expects third-quarter earnings per share (EPS) between $0.16 and $0.20 after previously forecasting EPS of $0.27 to $0.32. The Street estimates third-quarter EPS of $0.29. “We have seen traffic trends improve in the final week of September, as we conveyed a clearer pricing message to our customers,” said Michael Weiss, Express chairman, president, and CEO.

2) Mosaic slumps 2.4 percent after missing on the top and bottom line as lower phosphate fertilizer volumes and prices weighed. Mosaic reported first-quarter EPS of $1.03, compared to analysts’ estimate of $1.15. The company sees second-quarter total sales volumes for potash to range from 1.6 to 1.9 million metric tons, depending on shipments to India and China. “While current sentiment is being affected by volatile markets and challenging weather conditions, farm economics remain compelling,” said Jim Prokopanko, Mosaic president and CEO.

—By CNBC’s Bob Pisani

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