CHASE Manhattan’s stock has been beaten brutally by investors since late March but has lately been staging a nice rally. Are people really that stupid? Not that Chase isn’t a good bank; it’s just not a good investor. And lately there is more riding on its investments than its loans.
You’ve probably read about all the money managers who took a whupping since March, when the whole market – and particularly the dot-com segment – was blasted to smithereens. Well, Chase was at Ground Zero.
Last week, J.P. Morgan & Co. took the highly unusual step of downgrading the stock of Chase from a “buy” rating to just a “market performer.” That’s about the worst recommendation that Wall Street gives these days. It means just what it says, Chase will do no better than the market as a whole.
And the market isn’t doing very well at all. In fact, the Nasdaq – where many of Chase’s investments reside – is down more than 22 percent on the year. And the Dow, with its so-called safer stocks, isn’t much prettier, with a 9-plus percent drop since January.
The downgrade of Chase caught the attention of more than a few people in the financial community because it is very unusual for one investment firm to pick on another – professional courtesy and all that.
But the analyst over at J.P. Morgan – a woman named Catherine Murray – was bothered by how badly Chase was doing with its so-called “private equity income” – another way of saying its investments.
She told clients – but wouldn’t talk to me – that “we are lowering our 2000 earnings-per-share estimate to reflect lower than previously expected private equity income in 2000.”
What’s that mean? Murray told her clients, “We expect lingering uncertainty regarding the outlook of the Nasdaq, and more Fed tightening, to limit stock outperformance for at least two to four months.”
I know, that requires a translation from Wall Street jargon to English. Here goes.
Chase invested in a lot of high-tech beginners whose stocks trade on the Nasdaq. And because of things like rate hikes, these over-the-counter, over-the-edge stocks aren’t going to do very well. And, so, neither will Chase.
Morgan’s Murray now thinks that Chase will earn just $1.29 a share in the second quarter, compared with the $1.61-a-share previous guess. Part of the reason is Chase’s purchase of the technology-oriented investment firm of Hambrecht & Quist last year loaded the bank up with lots of high-tech exposure.
So are thing’s settling down?
J.P.’s Murray may think so; others don’t.
A lot will depend on how the whole market behaves. But another bank in a similar position is hinting that it doesn’t see the turnaround from all those risky dot-con investments that banks were so eager to make.
FleetBoston Financial Corp. reported just last week that its venture capital gains were cut by more than half by the bad performance of the market during the early part of this quarter. In fact, FleetBoston said it now had gains of just $300 million, down from $800 million before.
“FleetBoston was one of the few banking institutions to actually quantify the extent of the diminution of venture capital gains during the month of April,” says Charles Peabody, of Mitchell Securities – and one of the best bank analysts on Wall Street. “I believe that FleetBoston highlighted the magnitude of their change in order to expose the potential weakness at other banking institutions.” Wow, would they really do that to competitors?
You bet. And if the investments that banks made are really that bad, what is Chase stock doing today at $73 a share? Its high was $98.50 back when the market was healthier on March 23, but it dipped all the way down to $68.75 in the middle of this month.
Making matters worse is that rising interest rates should cut into Chase’s loan volume. And its investment-banking business won’t do very well if the stock market continues to sag.
I couldn’t get any comment from Chase. Could Chase ever be in enough trouble to need a bailout from a merger partner? That could happen, but the bank’s nowhere near that point. So investors will just have to play the profit picture – which is a little creepy right now.
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A couple of weeks ago, this column identified Southdown Inc. as a takeover target. Last week, Blue Circle Industries, a competing British cement maker, ‘fessed up that it was in talks with Southdown.
So far, so good.
But traders who’ve been tracking the situation think that Southdown may have trouble getting its shareholders to go along with a deal like that.
You might recall from the earlier column that Blue Circle’s interest in Southdown was prompted by Lafarge S.A. making an unsolicited and unwanted bid for Blue Circle.
The betting is that Blue Circle shareholders probably aren’t as opposed to the Lafarge bid as the company’s management is. And the purchase of Southdown would put up a roadblock that will probably annoy Blue Circle shareholders a little more.
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The stock market has had a bad time so far this week. And the inane explanations of why this happened are probably getting to you as much as me.
Here’s the real reason.
Stock prices go down when interest rates go up. But stock prices didn’t go down immediately after last week’s half-point rate hike by the Federal Reserve because it was an options expiration week.
And stock prices are almost always abnormally strong during options expiration weeks. This week – and during the weeks ahead – investors will pay the price for last week’s market tampering.
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