Bank of America, Wachovia: A Down (Grade) Day

Bank of America says their fourth quarter results will be "disappointing" and there are more write-downs coming due to exposure to collateralized debt obligations (CDOs). They will likely not be buying back stock until 2009. Down 2 percent pre-open.

Wachovia Bank will put aside about $1 billion to cover mortgage-related losses; down 2 percent pre-open.

The failure of the Fed to cut more than 25 basis pointswas one factor that caused Guy Moszkowski at Merrill Lynch to downgrade Bank of America. He also downgrades JP Morgan and Wachovia. He notes that Merrill is expecting a "consumer recession" in 2008, and that a firm like JPM will be hard-pressed to avoid the pain entirely.

If that's not enough of dumping on the banks, how about this one: Morgan Stanley named Citigroup as their top short idea for 2008. Their reasoning: "earnings are deteriorating, we expect new management to deliver a dividend cut, not a breakup, and we expect further hybrid issuance, diluting current shareholders."


1) More holiday cheer: Office Depot sees "continued erosion of sales and earnings" and that weakness it had seen in the third quarter in Florida and California appears to be spreading to other parts of the country.

2) Morgan Stanley downgrades the entire airline sector, talking about higher fuel costs and a weak economy. US Air,Northwest, Delta, and AMR downgraded, but Continental and Southwest are upgraded.


3) MMM is making more positive comments. They see 2008 estimates at $5.44-$5.47, analyst estimate is $5.43 . That's about 10 percent EPS growth. U.S. will be slow but will continue to grow, the second half of the year will be stronger than the first, and softer but stable worldwide economic growth in 2008.

4) While traders were clearly disappointed with yesterday's tepid Fed announcement, others were noting that the sky has not fallen.

George Friedman at Stratfor notes that, in theory, oil prices at $100 and the bursting of the subprime mortgage market should have created global havoc--but it hasn't. He notes that the overall stock market has not plummeted. Nor has the bond market collapsed and driven interest rates up; just the opposite has happened.

As for a devastating chain reaction from housing, where is it? Global markets continue to hold up. One major factor, Friedman notes, is Asian money flowing into U.S. market, which have helped keep interest rates low: "We would argue that the money is coming from the dollar bloc and its huge free cash flow from China, and at the moment, the Arabian Peninsula in particular. This influx usually happens anonymously through ordinary market actions, though occasionally it becomes apparent through large, single transactions that are quite open."

He argues that this foreign inflow of cash has been a major factor helping the U.S. markets.

Questions? Comments?