Credit Market Worries Drag U.S., Europe

123jump.com Staff
19 Oct, 2007
New York City

U.S. stocks fell after earnings report from Wachovia Corp showed $1.3 billion charge related to leveraged loans and structured products. The bank also suggested that more problems may be ahead. Weakness in earnings from 3M and Caterpillar weighed on the market sentiment. Schlumberger dropped 10% after revenue in the North America fell. Record weakness in dollar and firmness in oil near $90 hurt stocks. Asian markets closed sharply lower. In Europe, UK fell more than 1%.

[R]2:00PM New York – Global markets trade lower. Japan lost 3% for the week and European markets fell on strong euro and weak banks.[/R]

A flood of earnings from large U.S. companies failed to dampen the sober mood in the morning trading. Nasdaq and S&P 500 at its worst declined 1.5% and Dow fell 2% as oil climbed above $90 a barrel and dollar dropped to yet another record low.

Wachovia bank reported a decline of 10% in profit on $1.3 billion of charges from leveraged loans and structured products. The news of the charge before the market opening hurt the sentiment. Investors are increasingly worried that the unfolding correction in the housing market may lower earnings in the financial sector in the coming quarters.

Overnight the governor of the Bank of Japan commented that left an impression in the market that credit markets may take longer to stabilize.

Wachovia Corp ((WB)) fell 2.5%. HSBC, British bank with global operations, fell 2% on a downgrade to “sell” from UBS. Countrywide Financial fell 6.5%, Washington Mutual declined 5.3%, and Citigroup and Bank of America fell 2%.

Caterpillar ((CAT)) fell 3% after reporting earnings rise of 21% but lowered the earnings guidance for the year 2007.

Schlumberger ((SLB)) plunged 9.7% to $100.55 after reporting earnings of $1.35 billion or $1.09 per share compared to $999.8 million or 81 cents. Revenue in the North America declined 3% to $1.3 billion.

3M ((MMM)) fell 7% after reporting earnings rise of 7.4% to $960 million or $1.32 per share compared to $894 million or $1.18 per share. Revenue in the quarter rose 5.4% to $6.18 billion and rose 9.4% including the recent divestiture of the European drug business.

Oil fell near $88 per barrel but rose to a record intra-day high of $90.02. The geopolitical uncertainties, weakness in dollar, and overnight bomb explosion in Pakistan fueled the rise of oil to a new peak. Dollar edged to $1.43 against euro lifting precious metal and oil in the morning trading.

European markets closed lower across the region led by a fall of 1.3% in the UK and 1% decline in Switzerland.

Brazil led the decline in Latin American markets with a sharp fall of 2.5% followed by a loss of 2.0% in Mexico.

In Asian markets India, Indonesia, and Korea dropped more than 2% and Japan lost 1.7%.

[R]11:00AM New York – Caterpillar fell 3% after reporting lowered earnings outlook for the year.[/R]

Caterpillar Inc ((CAT)) reported that third quarter sales of 11.442 billion and earnings of $927 million and earnings per share of $1.40.

Sales and revenues increased $925 million compared to the third quarter of last year, $385 million from higher sales volume, $267 million from improved price realization, $174 million from the effects of currency and $99 million from higher Financial Products revenues.

Third-quarter profit increased $158 million, or $0.26 per share, from third quarter 2006. The increase in profit was due to improved price realization and higher sales volume, partially offset by higher manufacturing costs, including material costs.

The full-year outlook for 2007 is for sales and revenues of about $44 billion and profit per share in the range of $5.20 to $5.60, compared to $5.17 per share in 2006. The previous outlook for 2007 sales and revenues was about $44 billion, and profit per share was $5.30 to $5.80.

Caterpillar''s preliminary outlook for 2008 reflects a sales and revenues increase of 5 to 10 percent and profit per share up 5 to 15 percent from the mid-point of the 2007 outlook range.

Sales and revenues for third quarter 2007 were $11.442 billion, up $925 million, or 9 percent, from third quarter 2006. Machinery volume was up $397 million. Engines volume was down $12 million with on-highway truck engines down about $470 million, mostly offset by increases in electric power, petroleum and marine engines. Price realization improved $267 million. Currency had a positive impact on sales of $174 million, driven primarily by the stronger euro.

Machinery and Engines sales improved $826 million despite the impact of the severe drop in demand for on-highway truck engines and weakness in North American construction sales. The strength of economies outside the United States, our broad global footprint and growth in integrated service businesses, all contributed to 8 percent growth in sales. The diversity and strength of our full range of engine products more than offset the profit impact of the severe decline in on-highway truck engines.

Profit per share improved 23 percent, primarily a result of improved price realization and higher physical sales volume. The improvements were partially offset by a $294 million increase in core operating costs and an unfavorable impact from currency of about $60 million.

Machinery and Engines sales outside North America are expected to be up 25 percent from 2006, or about $4.6 billion -- more than offsetting a $2.5 billion, or 12 percent, decline in North America.

We are maintaining our projection of 2007 sales and revenues at about $44 billion, or a 6 percent increase from 2006. Sales outside North America are expected to be up about $4.6 billion, or 25 percent -- more than offsetting a $2.5 billion, or 12 percent, decline in North America. This improvement reflects continued strong economic performance outside North America.

[R]10:00AM New York – Wachovia Corporation declined 2% after reporting lower earnings of 89 cents per share and a charge of $1.3 billion on structured products and leveraged finance.[/R]

Wachovia Corp. ((WB)) today reported net income of $1.69 billion, or 89 cents per share, in the third quarter of 2007 compared with $1.88 billion, or $1.17 per share, in the third quarter of 2006. Net interest income in the quarter rose to $4.584 billion from $3.578 billion.

After-tax net merger-related expenses amounted to 1 cent per common share in the third quarter of 2007 and 2 cents per common share in the third quarter of 2006. Excluding these expenses, earnings were $1.71 billion, or 90 cents per share, in the third quarter of 2007 and $1.90 billion, or $1.19 per share, in the third quarter of 2006.

Results in the third quarter of 2007 included the full quarter impact of the October 1, 2006, acquisition of Golden West. Results do not include the impact of the acquisition of A.G. Edwards, Inc., a retail brokerage firm headquartered in St. Louis, Missouri, which closed on October 1 of this year.

Core deposits increased to $379 billion from $291.2 billion after the acquisition.

Revenue in the third quarter rose 4% from a year ago on higher loans and deposits, driven by the addition of Golden West and organic growth, while fee and other income declined reflecting disruption in the capital markets in fixed income and other market-related fees, including net valuation losses.

The company reported a loss of $1.3 billion in structure products and leveraged finance warehouse loans and commitments, and $40 million on asset-backed commercial paper investments.

The bank also provisioned for credit losses of $408 million reflecting modest deterioration in credit quality, a more uncertain credit environment and loan growth. Net charge-offs were $206 million, or an annualized 0.19 percent of average net loans. Total nonperforming assets including loans held for sale were $3.0 billion, or 0.63 percent of loans, foreclosed properties and loans held for sale.

Tier 1 capital ratio at the end of the third quarter declined to 7.2% from 7.4% and total capital ratio held declined to 11.0% from 11.4%.

Wachovia Corp ((WB)) stock traded between $44.83 and $58.80 in the last 52 weeks of trading. The stock opened lower in the morning trading and declined 90 cents to $47.25.

[R]6:00AM New York, 7:00PM Tokyo – For the Week stocks in Japan fell 3%.[/R]

In Tokyo trading Nikkei 225 fell 1.71% or 291.72 to 16, 814.37 on Friday and 3 % for the week, while the broader Topix Index declined 2.1% or 33.66 to 1,584.69 and 4.2% for the week.

Of the Nikkei 225 stocks 20 advanced, 200 declined, and 5 were unchanged. Kyowa Hakko Kogyo led the gainers in the index with a surge of 16.64% on news that Kirin Holdings is in talks to acquire the pharmaceutical firm to strengthen its drug business. Exporters fell on a rising yen.

In the first section of the Tokyo Stock Exchange 17 billion shares valued at 2.4 trillion yen were traded and in the second section 391 million shares valued at 8.5 billion yen changed hands.

Bank of Japan Governor Toshihiko Fukui said, yesterday after meeting with the U.S. Federal Reserve Bank chairman Ben Bernanke, that it is taking longer than expected to stabilize the credit markets. He added that conditions in the financial markets are still uncertain.

Bank of America and Washington Mutual are the two banks to report losses from the credit market turmoil in the U.S. More than fifteen institutions have reported losses of nearly $28 billion in the last three months from the credit market malaise.

Nikkei reported today brewer Kirin Holdings is in talks to acquire a controlling stake in Kyowa Hakko Kogyo and list the business as its subsidiary. Market watchers value the pharmaceutical company at more than 300 billion yen if a 30% premium is paid. Kirin is seeking to augment its revenue streams that have been after by declining beer production.

Crude oil prices rose to $90.02 per barrel lifting the oil company Inpex Holdings 0.8%. Record price in crude oil in international market partly reflects dollar weakness and investors desire to diversify away from the U.S. stocks.

Of the Nikkei 225 index shares, Kyowa Hakko Kogyo led advancers with a surge of 16.44%, followed by gains of 5.11% in Clarion Company Limited, 4.95% in Credit Saison Company, 4.46% in Yahoo Japan Corp, and 2.40% in Shinsei Bank Limited.

Consumer lenders rose after Acom Co., Ltd revised its forecast for operating and net income. The company issued the revised consolidated operating income forecast for the first half of the fiscal 2008 63% to 49,398 million yen from 30,300 million yen. However net income estimate was revised lower to 24,845 million yen from 29,500 million yen. Net income per share was lowered from yen to 158.05 yen.

The company added in the press release that In addition to expected 4.9 billion yen increase in interest on loans receivable, bad-debt-related expenses and other operating expenses are expected to decrease by 8.5 billion yen and 3.1 billion yen, respectively.

Acom stock surged18% on the news lifting Aiful and Takefuji as well.

Comsys Holdings Corp led the decliners in the index with a plunge of 8.10% after Nikko Citigroup cut its target price, followed by losses in Sumitomo Osaka Cement Company of 5.45% on lowered rating from Mizuho Financial, in Tosoh Corp of 5.09%, in Sumitomo Corp of 4.65% and Matsushita Electric Work of 4.56%.

With talks of weak dollar intensifying in the currency markets, Sony declined 2.03%, Honda Motor Corp fell 1.39%, and Canon lost 2.79%.

Electric companies fell as Dai-Dan Co lowered its profit forecast for the current year to a 17-year low by three-quarters. Fuji Electric Holdings declined 1.67% and Denso Corp retreated 1.98%.