It's officially a trend because it's happened more than three times -- a bad financial report leads to a spike in stock prices. (I posted here and here about this phenomenon with Citigroup (NYSE: C) and Bank of America (NYSE: BAC) respectively). Now, the New York Times reports that five banks lost billions, or saw their profits plunge, but their stock prices rose an average of 12.9% in the wake of those reports.

Why? The conventional wisdom suggests that investors expected them to do much worse and were pleasantly surprised. And this phenomenon is not confined to banks -- this morning, Yahoo (NASDAQ: YHOO), which reported a penny less profit per share than the 10 cents analysts had expected, is up 3% in premarket, reportedly because it did not lower its guidance.

I am not convinced by conventional wisdom about why these stocks are up. My hunch is that there were many traders who sold short the stocks of these companies because they expected them to do worse than they actually did. When reported results beat expectations, investors bought the stocks, perhaps due to bottom fishing. These buyers caused the stocks to rise enough to trigger margin calls for those who were short. The shorts bought to satisfy those margin requirements, causing a buying panic. I wish I had data to test this hypothesis.

Here are five examples:

• Citigroup reports $2.5 billion loss -- expected loss was $3.67 billion -- stock rises 9.7%.
• Bank of America reports 41% drop in EPS -- expected decline was 48% -- stock creeps up 3.8%.
• Wachovia (NYSE: WB) declares $8.9 billion loss, stock soars 29%. This could have something to do with its announcement that it would not issue new shares that would dilute existing shareholders.
• Washington Mutual (NYSE: WM) loses $3.3 billion, stock goes up 6.2% -- its loss of $3.34 a share was triple the $1.05 loss analysts had expected. I cannot even begin to explain why the stock rose.
• SunTrust Banks (NYSE: STI) profit declines 21% -- expected decline was 66% -- stock increases 16%. This one makes some sense to me.

Does this mean that the bottom fishers are right? It's possible, but I doubt it. My hunch is that it will take more than another quarter or two to clear out all the problems from an $8 trillion loss of wealth in America resulting from the real estate market collapse. These recent upticks could be a classic bear market rally. If you are a short-term trader who jumped in last week, be prepared to take your profits.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

Read | Permalink | Email this | Linking Blogs | Comments

Permalink | Email this | Linking Blogs | Comments

The Federal Reserve Board led by chairman Ben Bernanke has held fast to the current 2% Fed rate and made it clear on several occasions that the rate will hold. This is a clear sign the Fed intends to have a bias toward inflation for the time being (although that can change) and is more likely to raise rates, and this should prevent further erosion of the dollar. I do not have any idea when or if inflation will start to erode our economy but a period of consistent interest rates sets the right course and stable interest rates and a stable dollar are a good thing.

There are many more signs that the market is turning. This should not be viewed as a Pollyanna attitude on my part that we have already seen the worst or things will not take another downturn. If the Dow started back down and approached 10,000 it would not shock me, but I think that it would take something we are not aware of now to do that.

This morning United Parcel (NYSE: UPS) reported a 21% loss in the quarter and a negative outlook and the stock is up.

UnitedHealth Group Inc. (NYSE: UNH) 2Q profit falls and the report from the AP is exemplary of the type of attitude I see from the long players (like me): "Shares of managed-care provider UnitedHealth Group Inc. jumped 9 percent Tuesday after the company reported sharply lower second-quarter earnings because of lawsuit settlements and a tough economy, but still beat Wall Street expectations" (my emphasis).

I am not declaring that the recent market bounce is the beginning of a positive stock market run but I do believe the groundwork is being set for improvement in the markets. While there are plenty of places you can and will read about gloom and doom, I am changing my outlook to positive and have already reported that when the "boys of summer" appear for spring training next year there will be many investors who will look back on this summer as a missed buying opportunity.

I called it last week with Will Bush throw a change-up at Yankee Stadium? Bush threw out that ball and extended a hand to the Iranians at the same time -- and the tide has turned.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of UPS.

Permalink | Email this | Linking Blogs | Comments

Wachovia Corp. (NYSE: WB) is recently up $1.33 to $14.45. Wachnovia reported Q2 EPS loss of ($1.27) ex items verses consensus estimates of ($0.78). WB lowered its quarterly dividend to $.05. WB will take a $6.1 billion goodwill charge for Golden West. WB August option implied volatility of 94 is below a level of 141 from July 21 and above its 26-week average of 59 according to Track Data, suggesting larger price movement.

Financial Select Sector SPDR (ETF) (AMEX: XLF) is recently up $.30 to $21.05. XLF August option implied volatility of 50 is above its 26-week average of 37 according to Track Data.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Permalink | Email this | Linking Blogs | Comments

Permalink | Email this | Linking Blogs | Comments

Wachovia (NYSE: WB) is out with numbers that were much worse than the Street had estimated. According to MarketWatch Wachovia "lost $8.86 billion, or $4.20 a share, in the second quarter, compared to a profit of $2.34 billion, or $1.20 a share, a year ago. On an adjusted basis, it lost $1.27 a share; analysts polled by FactSet Research had expected a loss of 71 cents a share."

Yikes. A loss of $8.9 billion -- how is that even possible? The company also slashed its dividend to just 5 cents a share and is closing down its wholesale mortgage operations.

I guess the real question is barring a takeover, how long will it be till the whole bank gets shut down? Just think the loss is equal to a third of its entire market cap.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/22/08.

Read | Permalink | Email this | Linking Blogs | Comments

• Bush Prods Congress, as Financers Are Inspected - Treasury Secretary Henry M. Paulson Jr. said examiners are inspecting the books of Fannie Mae and Freddie Mac.
• GM, utilities team up on electric cars - Partnership aims to tackle issues that will crop up when electric vehicles are rolled out.
• H&R Block names McDonald's executive CEO
• Ford to Make Broader Bet on Small Cars - After two decades focused on trucks, the company is about to drastically shift focus to building smaller cars.

Permalink | Email this | Linking Blogs | Comments

Foundry Networks (NASDAQ:FDRY) is up over 30% on a buy-out by Brocade (NASAQ:BRCD). Brocade is off nearly 20% on the same news.

Apple (NASDAQ:AAPL) is off 10% on a weak forecast for the next quarter.

Wachovia (NYSE:WB) is off 12% on poor earnings and a dividend cut.

American Express (NYSE:AXP) is down over 10% after reporting a weak quarter.

Texas Instrument (NYSE:TXN) is off over 10% on poor numbers.

Shares may trade differently in the pre-market than they do in the regular session.

Douglas A. McIntyre is an editor at 247wallst.com

Permalink | Email this | Linking Blogs | Comments

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Permalink | Email this | Linking Blogs | Comments

Permalink | Email this | Linking Blogs | Comments

Wachovia (NYSE: WB) is recently up 68 cents to $13.65. WB is scheduled to report Q2 EPS on July 22. WB call option volume of 50,778 contracts compares to put volume of 61,557 contracts. WB August option implied volatility of 141 is above its 26-week average of 58 according to Track Data, suggesting larger price movement.

Mid-afternoon equity option family volume leaders: Citigroup (NYSE: C), Apple (NASDAQ: AAPL) Bank of America (NYSE: BAC) and Wachovia (NYSE: WB) according to Track Data.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Permalink | Email this | Linking Blogs | Comments

Genentech (NYSE:DNA) is up over 10% on a buy-out offer from Roche.

Bank of America (NYSE:BAC) is up over 8% on solid earnings.

Wachovia (NYSE:WB) is up 7%, probably due to strong BAC results.

Yahoo! (NASDAQ:YHOO) is down 6% on news it has settled with Carl Icahn and given him seats on its board.

Stocks may trade higher in the pre-market than they do the regular session.

Douglas A. McIntyre is an editor at 247wallst.com.

Permalink | Email this | Linking Blogs | Comments

The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.

That's thanks to a temporary rule it created last Tuesday that blocks the short selling of the stock of 19 big banks and financial institutions unless the short sellers can borrow those shares. (As Barron's [subscription required] points out -- it's interesting that the SEC has announced it is enforcing this so-called naked short rule since the practice is already illegal).

I can only imagine the profit opportunities available to those who had early access to this list of 19 -- which according to my calculations have risen an average of 27.5% since Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- whose CEO made $20 million last year, according to AP -- are the biggest winners -- up 90% and 74.5% respectively since then. Meanwhile, all the other companies that the SEC did not protect are wondering why they were not on the list.

The SEC's actions raise many questions:

• Why did the SEC decide to enforce the prohibition on naked short selling just on these 19 companies? Why not enforce it against all companies?
• Why did the government allow our financial system to become so vulnerable that short sellers could easily profit from its fragility?
• Why not punish those who mismanaged these financial institutions rather than those who profit from exposing that mismanagement?

I don't know the answers to these questions. My hunch is that the answers are a combination of a "free market" political philosophy, the way Wall Street gets paid -- as a percentage of big deals rather than the long-term profits (or losses) from them -- and the amount of money Wall Street gives to get politicians into office.

The SEC's actions suggest that it values the executives of those 19 companies far more than it does the viability of the financial system. If it had been concerned about protecting investors, it would have enforced aggressively its own regulations during the inhalation stage of the currently exhaling credit bubble.

Meanwhile, its decision to enforce its naked short selling rule for only 19 companies is a unique form of market manipulation -- the very thing the SEC was established to prevent.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Permalink | Email this | Linking Blogs | Comments

Permalink | Email this | Linking Blogs | Comments

Permalink | Email this | Linking Blogs | Comments

MOST NOTEWORTHY:

• Oppenheimer downgraded shares of Wachovia (NYSE: WB) to Underperform from Perform as they believe the outlook is "bleak" for equity shareholders. The firm thinks Wachovia's expenses can't come down fast enough too offset earnings erosion.
  
• Wachovia downgraded shares of American International Group (NYSE: AIG) to Market Perform from Outperform as they believe AIG's CDO valuations worsened in Q2, which could result in a $2B-$7B after tax "valuation adjustment." Wachovia expects the value of AIG's core insurance franchise to be obscured by its credit exposure.
  
• Collins Stewart cut BT Group (NYSE: BT) to Hold from Buy on concerns surrounding the company's fiber network expansion.

• Nokia (NYSE: NOK) was downgraded to Add from Buy at WestLB; the firm also lowered Ericsson (NASDAQ: ERIC) to Hold from Buy and Alcatel-Lucent (NYSE: ALU) to Sell from Hold.
  
• Third Wave (NASDAQ: TWTI) was cut to Hold from Buy at Deutsche Bank.
  
• AT&T (NYSE: T) was removed from Goldman's Conviction Buy List.

Permalink | Email this | Linking Blogs | Comments

Permalink | Email this | Linking Blogs | Comments

With shares in Lehman Brothers (NYSE: LEH) losing another 14% of their value Monday, and the stock trading under $13, rumors are swirling as to what the bank is planning to do. While there has been speculation that the bank may be taken private, an option that I think is very interesting, others have said that another bank is going to swoop in and take over the company. At the discount levels the stock is trading, that may make sense. The only problem is who the buyer will be.

MarketWatch has an interesting article about this issue and the claim is that there really is no one out there to make a bid for the struggling investment bank. The article quotes Jeff Harte, a securities industry analyst at Sandler O'Neill & Partners, " I'm hard pressed to give you many viable buyers of Lehman. Most large banks are focused on their own capital issues. Even if a bidder did come forward, it would have to win over a lot of Lehman employees -- who control around 30% of the stock -- or risk losing them once the deal was complete."

The most obvious suitor would be JPMorgan (NYSE: JPM), but it has its hands full with Bear Stearns. Other banks like Citigroup (NYSE: C) or Wachovia (NYSE: WB) are fighting for survival. That leaves us with European banks, many of whom are also trying to stay afloat. One bank that has the money needed to finance a deal could be Deutsche Bank (NYSE: DB). It could be interested in a deal as it would gain a foothold into the fixed-income desk at Lehman. The only problem is that the bank is focused on growing its retail banking franchise, not investment banking.

Which leaves us with the first option as the best one. Go private. Clean up the balance sheet, get profitable, wait a few years for the financial storm to pass, and go public once again.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/15/08.

Read | Permalink | Email this | Linking Blogs | Comments

E*Trade (NASDAQ:ETFC) is up about 5% on news it sold its Canadian operations.

Genentech (NYSE:DNA) is up 2% on a strong 2008 outlook.

Wachovia (NYSE:WB) off 10% on a brokerage downgrade.

AIG (NYSE:AIG) down 7% as its shares are also downgraded.

Stocks may trade differently in pre-market than they do in the regular session.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Permalink | Email this | Linking Blogs | Comments