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Market Wrap-up: surprising stock market reversal after early morning slump

|Includes: AMZN, ASB, BAC, FMBI, GOOG, GS, JPMorgan Chase & Co. (JPM), MS

 The stock market started off at a lethargic pace reminiscent of yesterday’s poor action, but suddenly woke up around 10:30AM, from which point the S&P gained 11 pts and ended up 83 bps for the day compared to 50 bps for the Dow and 112 bps for the Nadsaq, which strengthened in front of Intel’s – INTC earnings release on Thursday.  Investors had been taking some profits in tech stocks following some early warning signs, but in the end investors expect very strong results from Intel.  One of the biggest gainers was actually a tech stock, Baidu – BIDU was up 13%, on news that its biggest threat, Google – GOOG, was thinking of graciously exiting China.  Google cited a sophisticated hacker attack, but the cynical view is that the company found an excuse to bow out of a country that has been the cause of a lot of troubles.

The driver behind the market turnabout was the Financials sector, which caught investors by surprise.  Apparently, the Financial Crisis Inquiry Commission panel, where top chief executives – Blankfein of Goldman Sachs – GS, John Mack of Morgan Stanley – MS, Jamie Dimon of JP Morgan – JPM, and Brian Moynihan of Bank of America – BAC – were questioned about their role in fueling the financial crisis turned out to be pretty benign.  Its conclusion might have been the trigger for the market rally.  The health-care sector was also a market leader after Credit Suisse upgraded Merck to outperform from neutral.  Energy stocks were the overall laggards after a report showed a larger-than-expected increase in US crude oil inventories.

Another reason for banks’ outperformance included the rejection of AMCORE Financial’s – AMFI ($45bn asset bank with exposure to the Chicago market) capital restoration plan by the OCC, which sent the stock down 19% but was also interpreted as a unique opportunity for many of the regional players who want to build out their exposure in that market, e.g., Fifth Third – FITB, which was up 5%.  The opportunity would come about if the FDIC decided to shut down AMCORE and give it to one of the regionals via an FDIC-assisted deal.  These deals have been very accretive in the past and explains the strange market reaction to the first couple of banks’ poor earnings reports and capital raises, which have been met with very strong price action. 

Associated Bancorp – ASBC raised 25% of its market cap on Monday and the stock is almost back to pre-news levels, and First Midwest – FMBI announced a similar capital raise today following a disappointing earnings miss by a wide margin, yet its stock actually closed up 5%!  The latter reaction was interpreted as short-covering and investor confidence that First Midwest’s strong management could execute on an FDIC-assisted deal-centric strategy.  It showed investors that it is not safe to shot regional banks with large commercial real estate exposures and problems as institutional investors seem still underweight the sector and can be particularly hungry for capital raises that give them an opportunity for alpha-generation.

Marc Faber offered his thoughts on Bloomberg following a panel of experts that he attended yesterday.  Experts think the markets will rise between March and June and then correct to flat by year end.  According to Faber, this type of complacency may lead to a more meaningful correction in the near term, but is likely to reverse by year-end.  Everyone seems to think that the market is fine and the momentum is on the upside.  From his point of view, he sees Amazon – AMZN, Google – GOOG, and Goldman Sachs – GS not doing well, so he has evidence of weakness emerging.  Also, after the huge gains last year, it's tough to have a repeat this year.  The risk-reward in the S&P is not particularly good right now.  Faber thus advocates taking a break from the markets in order to preserve capital. 

Faber expressed concern about the value of the US dollar because the Fed cannot stop buying securities; otherwise, the market will decline and interest rates will go up.  On the “so what” question around excessive liquidity and a weak currency, Faber answered that the strongest manufacturers and exporters in history have had strong currencies.  In other words, money printing does not create wealth.  The US government is mistaken in thinking that it can fix things with permanently low interest rates.  The US' share of global GDP is and will continue to go down if things don't change.  (video link here:

Disclosure: No positions