Ahead of Wall Street - June 22, 2012

Friday, June 22, 2012

Relief at the lower than expected downgrades of major banks by a rating agency is expected to be a key factor in today’s trading action, as the data docket is otherwise on the thin side. In headlines out of Europe this morning, German business confidence is materially down, highlighting that the country is not immune from all the negative cross-currents in its vicinity. Concerns about global growth have taken center stage, causing the sharp sell-off on Thursday, and are likely to replace today’s temporary bank-related positive momentum.

Moody’s came through with its long-standing downgrade threat, by lowering its ratings on more than a dozen global banks, including five of the biggest U.S. banks. U.S. banks that suffered downgrades of two notches each included Morgan Stanley (MS - Analyst Report) – from A2 to Baa1), Goldman Sachs (GS - Analyst Report) – from A1 to A3), Citi (C – from A3 to Baa2), and J.P. Morgan (JPM - Analyst Report) – from Aa3 to A2), while Bank of America (BAC - Analyst Report) was lowered by one notch – from Baa1 to Baa2).

The downgrades will no doubt result in additional direct expenses through additional collateral requirements and the need to make termination payments. But they turned out to be less severe than the market had been expecting. As such, we will likely see bank stocks move up in relief that the news could have been much worse. Some may even say that rating changes don’t matter anymore, but that is not entirely accurate - they do matter, particularly for banks.

In corporate news, Darden Restaurant (DRI - Analyst Report) came out with in-line earnings on modestly lower top-line numbers. The operator of Oliver Garden and Red Lobster also announced a 16% increase in quarterly dividend. We also got a negative pre-announcement from Ryder Systems (R - Analyst Report), the truck leading company, citing a lower demand environment. In other news, Monster Beverages (MNST - Snapshot Report) joins the S&P 500, replacing Sara Lee (SLE), after the market’s close on June 28th. On that date, Sara Lee will complete the spin-off of its international tea and coffee business and will get renamed to Hillshire Brands (it will have a new ticker – HSH).

Sheraz Mian
Director of Research