The market erases gains driven by a strong GDP growth report as it digests disappointing tech outlook and gets whipsawed by Greek bond action

2010-01-29

The Dow was up more than 100 points after the market received news that the advance estimate for US GDP growth for 4Q09 came in at 5.7% vs the expected 4.5%.  This was the fastest rate of growth in 6 years, though it mainly reflected inventory restocking.  Still, real final sales -- a better measure of true underlying demand, which is calculated by subtracting inventories from GDP -- were up 2.2% vs 1.5% in 3Q.

The morning gains though were short-lived as many stocks wouldn't participate in the advance.  Technology stocks were again the worst performers with the index down 145 bps vs. 98 bps for the S&P and 52 bps for the Dow.  Technology had been the best performing sector and investors had already built into the stocks' prices very high expectations.  Even though most tech companies beat consensus, investors sold shares, either to lock in gains after the news since there are increasing concerns about the health of the economy and the government's exit, or because guidance did not meet the V-shaped recovery expectations reflected in tech stocks' prices. 

SanDisk - SNDK was down almost 12% today after releasing its 4Q results last night.  Even though it easily beat expectations of a 69c profit by reporting $1.18 (excluding one-time items), the guidance disappointed -- even though it was within consensus range -- because investors expected a raise in guidance.  Microsoft - MSFT and Apple - AAPL were down ~3.5%, a pretty big move for two of the best companies.  Apple has this big drop only two days after announcing the long-awaited iPad.  Apparently, journalists are underwhelmed by the device that is lacks some key features of the iPhone (camera) and the MacBook (running programs).  Arch Coal - ACI was one of the biggest losers of the day, down 14% after its earnings missed estimates.  The company had the lowest amount of shipments in five years because of anemic demand to generate electricity and produce steel, a comment that did not bode well for the company's and the sector's outlook.  The market penalized them for being the least hedged among their peers, taking the position that the market will turn sooner rather than later.

In terms of the ripple effects that Greek CDS have on the US market, the issue is that investors do not trust the Greek government that it can restore financial discipline and pay its debtholders back on time.  The result could be significant disruption in the EU, depending on how the issue gets resolved: some have pondered that Greece will exit the EU, but the majority believes that the EU will bail Greece out if it comes to that.  The problem there is that if Greece is bailed out, there will be five other countries lining up for a bail-out in no time and then the EU system becomes unsustainable.  It is a tough situation that can have a global ripple effect.  Greece has now taken the place of Dubai in disrupting the global credit markets.  There are rumors that John Paulson is behind the crisis, buying CDS against Greek debt, blowing up the spreads, and thus giving cause for concern.  In an environment where investors are on edge, such manipulation can have devastating effects.

In Davos news, Virkam Pandit, Citigroup's - C CEO, told Bloomberg at an interview that his goal is "profitability now and sustainable profitability".  He supported this statement by saying that the crisis in the capital markets is likely over, that we are close to peaking in consumer losses, and commercial real estate losses are ahead of us.  Citigroup has always been much more consumer-focused with the least exposure to commercial real estate among large banks.  This has hurt the company the most in the first two stages of the cycle, but the third leg works through commercial loans, and particularly commercial real estate.  These loans take longer to resolve and losses can persist for the next three to five years.  In the meantime, Citigroup's results should start improving, or at least that's the theory.  Of course, Citigroup still faces a lot of risks (regulatory, government ownership of 27%, continued losses in Citi Holdings, etc.), but a statement that the goal is to turn profitable now is pretty significant and something that can come back to haunt Pandit if he doesn't deliver. [video link: http://bit.ly/dsWXht]

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