Just like you never want to hear a doctor say "oops" in the operating room, you never want to see a going-concern statement in a financial report about a company you own. Accountants throw these in when they've been over the books, talked to customers, and checked the horoscopes and have concluded there is "substantial doubt" about a company's ability to remain in business. In short, don't blame the accountants if the company files for bankruptcy protection.

You¿d reckon that a going-concern statement would be enough to send investors running to the exits, but it's not. True, many large institutions automatically bail when an existing company gets slapped with one of these, but many individuals (often wrongly) take a chance they know more than the bean counters.

During the tech boom of the late 1990s, many companies actually went public even though they had been hit with going-concern statements. Many of those companies subsequently disappeared. Enough said.

Home / Markets

Tuesday, June 17, 2008

Uptick

Dow Loses 108 as Banks Tank

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Matt Egan

FOXBusiness

A prediction of more trouble to come in the financial sector spooked the market on Tuesday, sending the Dow more than 100 points into the red.

Today's Market

The Dow Jones Industrial Average slid 108.78 points, or 0.89% to 12160.30, the Standard & Poor’s 500 index dropped 9.21 points, or 0.68%, to 1350.93 and the Nasdaq Composite Index lost 17.05 points, or 0.69%, to 2457.73. The consumer-friendly FOX 50 declined 5.58 points, or 0.58%, to 948.61.

Goldman Sachs (GS) found itself at the center of both a rally and a selloff on Wall Street on Tuesday. An earlier rally had been sparked by Goldman's surprisingly strong quarterly earnings, which topped even the most bullish analyst estimates. By the end of the day the market turned sour after analysts at Goldman predicted banks will need to raise another $65 billion and that the credit crisis won't even peak until 2009.

A pair of economic reports also put pressure on Wall Street, showing producer prices soared by the most in six months while housing starts fell to the lowest rate since 1991.

Financial giants American Express (AXP) and AIG (AIG) led the Dow lower on Tuesday, falling 4% and 5% respectively. Just three stocks on the blue-chip index closed in the green, two of them being energy giants Chevron (CVX) and ExxonMobil (XOM).

The market failed to rally around declining crude oil prices, which fell for the third consecutive day. Oil futures backed down from a new record of almost $140 a barrel set a day ago, falling 60 cents on Tuesday to end at $134.01 a barrel.

Banking names like Lehman Brothers (LEH) and Morgan Stanley (MS) took big hits Tuesday on the gloomy Goldman note, which predicted another $65 billion in new capital to offset losses. That potential fundraising would be on top of $120 billion already raised.

As a result of the new forecast, Goldman lowered its price targets and earnings forecasts on many banks, including Wells Fargo (WFC) and PNC Financial (PNC).

"Anyway you slice it, it still points to slower earnings growth over the next several years. They are going from a hyper-growth mode…to a new era where there will be very little risk taking. It’s a new ball game for the financials," said Art Hogan, chief market strategist at Jeffries & Co.

The bearish predictions from Goldman are mirrored by negative sentiment expressed by Wall Street traders about the banking sector in general.

“There’s so much swirling around; there are so many rumors [about banks]," Alan Valdes of Hilliard Lyons told FOXBusiness. "We just don’t know really what’s going on. Every week there’s a new CEO getting laid off.”

While the Goldman research note sparked selling, the investment bank's quarterly earnings report had been the catalyst for an earlier rally on Wall Street. Fighting through a credit freeze and housing slump, Goldman easily beat the Street with a profit of $4.58 a share and $9.42 billion in net revenue. Mean estimates from analysts polled by Thomson Reuters were for a profit of $3.42 on $8.74 billion in revenue.

Goldman became the envy of other banks last year when it shorted, or bet against, the housing market. It made the bank billions while competitors like Bear Stearns struggled or even went out of business.

To be sure, Goldman's results were significantly weaker than a year ago. The bank's profit declined 11% and net revenue fell 7.5%. While Goldman has fared better than the rest of the financial sector, its stock has tumbled more than 20% from a year ago.

On the economic front, Wall Street was digesting a pair of mostly gloomy reports.

The Labor Department's producer price index, which is the industrial equivalent of the consumer price index, showed inflation rose by a worse-than-expected 1.4% last month -- the sharpest one-month rise since Nov. 2007. Economists surveyed by Dow Jones had been looking for a more modest 1% rise.

Most of that increase stemmed from soaring food and energy costs. When those two areas are removed, producer prices rose just 0.2%, right in line with expectations. Still, so-called "core" inflation was up 3% from a year ago -- equaling the largest one-year rise since 1991.

The inflationary results lend credence to the thinking that the Federal Reserve will likely pause its current streak of cutting interest rates, which can often fan inflation. The market expects the central bank to raise rates to fight inflation by the end of the year even as the economy stumbles along.

Meanwhile, the Commerce Department said housing starts tumbled 3.3% to 975,000 --the lowest rate since March 1991. Economists surveyed by Dow Jones had been expecting a 5.5% decline. The government also downwardly revised April housing starts to now reflect a 2% rebound. Previously, housing starts in April were seen 8.2% higher than March.

Those housing numbers did little to help the stock prices of home builders, with names like KB Home (KBH) and Lennar (LEN) falling sharply.

Corporate Movers

InBev hardened its stance on its $65 per share buyout offer for Anheuser-Busch (BUD) even after Sen. Claire McCaskill, D-MO, insisted she will do everything she can to “stop the sale.” InBev CEO Carlos Brito told reporters: “No, $65 is a great price, full price, that’s it,” according to Dow Jones. That statement came after Belgian newspaper De Standard reported billionaire investor Warren Buffett, who owns a 5% stake in A-B, endorsed the proposed buyout. A-B has yet to accept or reject the deal but is reportedly considering a takeover of Grupo Modelo, the Mexican maker of Corona.

Best Buy (BBY) tumbled 5% even though it reported second-quarter results that beat the Street. Best Buy's earnings fell 7% to 43 cents a share last quarter, six cents higher than what Wall Street expected. The company's revenue rose 13% to $8.99 billion, better than the $8.57 billion analysts had expected.

Electronic Arts (ERTS) must believe the fourth time will be the charm. The video game publisher of titles like "Madden" and "Call of Duty," extended its $2 billion bid to acquire "Grand Theft Auto" maker Take-Two Interactive Software (TTWO) for the fourth time. The new deadline for the $25.74-per-share offer is set for July 18. Once again Take-Two said the deal "significantly undervalues" the company. Take-Two urged shareholders to not tender their shares to EA.

American Stock Exchange said its members signed off on a $260 million deal to be acquired by NYSE Euronext (NYX), the operator of the New York Stock Exchange. The all-stock deal also includes Amex members receiving portions of the sale of its Manhattan headquarters near the NYSE.

CME Group (CME) rose sharply a day after the company said it received regulatory approval from the Department of Justice for its takeover of NYMEX Holdings (NMX), the owner of the New York Mercantile Exchange. Citigroup upgraded the stock to "Buy" on the news. CME Group, which is the operator of the Chicago Mercantile Exchange and the Chicago Board of Trade, said it sees $60 million in cost savings from the deal.

Wyeth (WYE) and Elan (ELN) said a clinical trial shows their Alzheimer’s drug bapineuzumab was effective in some patients and justifies late-stage studies. The highly anticipated results bode well for the drug, which could be the first to alter the path of Alzheimer’s and not just treat the symptoms, Reuters reported. Analysts reportedly predicted bapineuzumab could bring in $13 billion in annual sales.

Cadence Design Systems (CDNS) fell sharply after the electronic design software maker disclosed a $1.45 billion offer to acquire Mentor Graphics (MENT). The deal represents a 30% premium on Mentor’s closing price on Monday. Both companies manufacture software and hardware used to design and test semiconductors. Cadence made the offer public after two months of negotiations.

Genco Shipping & Trading (GNK) rose 9% after the company said it plans to buy six new dry bulk ships for $530 million to keep up with the demand to ship commodities like iron ore and coal. The new ships, which will bring the company’s fleet to 41 dry bulk vessels, are expected to delivered from the fourth quarter of 2008 until the end of 2009.

JetBlue (JBLU) benefited from an analyst upgrade by Morgan Stanley to “equal weight” from “underweight” on relatively strong liquidity.

World Markets

The Dow Jones Euro Stoxx 50 Index, a gauge of the 50 biggest companies in Europe, gained 22.75 points, or 0.64%, to 3555.58. The FTSE 100, London's benchmark index, rose 67.30 points, or 1.16%, to 5861.90.

On the continent, Paris's CAC 40 Index picked up 28.59, or 0.61%, to 4686.33 while Germany's DAX added 66.28 points, or 0.98%, to 6796.16.