Market Looks To Jobs, As Financials Still Face Troubles

Futures up a bit on the strong ADP report.This is a clear sign that the market wants a decent jobs report, even if it might slightly reduce the chance of an aggressive Fed rate cut. As noted yesterday, financials analysts are now cutting 2008 estimates.

What's important here is that some of them are assuming that there will be losses in mortgages that are outside of subprime. Why? Wells Fargo . Their announcement that they would take a $1.4 billion provision for potential losses in home equity loans was a wake-up call to the Street, as I emphasized when the news came out.

Today, bank analyst Meredith Whitney at CIBC is recognizing the home equity risk to other banks. She is cutting 2008 estimates for several banks. Example: she says Citi has the single largest exposure to residential loans with LTVs (loan to value ratios) over 90%. That exposure is about $29 billion in its home equity portfolio and $22 billion in its mortgage portfolio.

She applies a write-down similar to what Wells Fargo did last week, and estimates Citi could incur a $4.4 billion charge or ($0.61) per share. Bottom line: she cuts estimates 10% from her prior forecast and she is now 30 percent below Street consensus.

She also cuts 2008 estimates for JP Morgan by 10 percent due to a higher provision for losses and a continued protraction in capital markets. Her provision for losses increases 40%. She estimates JPM has at most $17 billion in exposure to high LTV home equity loans. She assumes that JPM will have a writedown for home equity loan losses similar to that announced by Wells Fargo last week; based on that assumption, she estimates that JPM could incur a $1.4 billion charge or ($0.27) per share.

Bottom line: she cuts estimates 10 percent for JP Morgan.

For Morgan Stanley , she cuts estimates by about 20 percent due to the continuing credit market turmoil. "We believe true credit market stability will only be reached when sellers ultimately clear assets, "cleansing" their balance sheets, so a true bid returns to the market. We anticipate that timing to be nearer to the second half of 2008 than the first."


1) Fannie Mae downgraded at Credit Suisse and Piper Jaffray on the heels of last night's 30% reduction in its dividend and a $7 billion preferred stock offering. Credit Suisse also downgraded Freddie Mac. Friedman Billings also lowered their price target on Fannie, noting that the capital infusion will be expensive to Fannie--they may have to pay 8.375 percent, which is what Freddie is paying for their preferred.

2) Guess puts in a terrific earnings report, beating estimates on top and bottom line, and guides higher for the full year. 2008 guidance also higher than expected. Comp store sales up 15.8% vs. a year ago. Wow. up 8 percent pre-open.

3) Russia is reportedly proposing putting export curbs on wheat, corn and milk; this may affect agricultural futures today.

4) Lots of discussion this morning on word that China's Ministry of Finance is planning to sell over $100 billion in 15 year bonds to finance their sovereign-wealth fund. Not clear if this will affect the Chinese appetite for U.S. treasuries or not.