Markets Start The Week On A Down Note Despite Bank Of America’s Positive Earnings

The markets started the week on a down note, as the S&P was down -4.28%. The Dow Jones was down -289.60 to close at 7841.73, while the NASDAQ was down -64.86 to close at 1608.21. The 10-year was down finishing with a yield of 2.843% as prices rose today. Crude contracts were down settling at $45.88, while June gold rallied today settling up at $887.50.

Bank of America (BAC) reported earnings Monday, and despite posting a record $36 billion in revenue, its stock price plummeted over -20%. BofA became the fifth straight large bank to report better than expected results, reporting earnings of $0.44 a share, or $4.25 billion, as opposed to the estimated $0.05 a share. Many investors were skeptical of BofA profits, with $2.2 billion coming from mark-to-market accounting, as well as a tax break of $1.9 billion pre-tax gain from the sale of China Construction Bank helping the bottom line. Bank of America also reported that its acquisition of Merrill Lynch contributed $3 billion to the banks net income. Many investors are concerned with loans as BofA added $13.4 billion to cover credit losses, and reported that they lost $1.8 billion on credit card services in the first quarter. Investor sentiment has clearly changed in regard to banks this week, as investors believe that loan problems are going to continue and even get worse in the coming months, with Citi (C) and JP Morgan (JPM) feeling the affect along with Bank of America.

News surfaced today, about PepsiCo (PEP) bidding $6 billion to acquire its two largest bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS). Pepsi would pay $29.50 and $23.27 a share for Pepsi Bottling and Pepsi Americas respectively, paying almost 17% above both companies trading prices as of Friday. The idea behind the proposed buyout would enable Pepsi to improve their supply chain, making it more flexible and agile, while at the same time increasing profit growth. These synergies would save $200 million for the company and increase earnings 15 cents once the synergies were completely realized. Pepsi already owns one third of Pepsi Bottling and two fifths of PepsiAmericas, but the takeover attempt shows that Pepsi wants to change the current distribution process of its products to its customers.

In M&A news today Oracle (ORCL) announced that it will buy Sun Microsystems (JAVA) for $5.6 billion. Shares of Sun were up over 36% today as it was announced that Oracle will pay $9.50 in cash for every share of Sun. This acquisition will complete the data center offering, and will also expose Oracle more to technology hardware. Oracle’s offer for Sun comes after talks between IBM (IBM) and Sun broke last month, due to IBM potentially facing regulatory issues if the deal went through and disagreements about the price. In related tech news today IBM reported earnings afterhours today of $1.71, or $2.3 billion. Big Blue saw a decline in revenue of -11%, and -4% if the effect of foreign currency was not accounted for. Despite the first quarter reports, IBM still maintains full year earnings estimates of $9.20 a share.

Disclosure: The fund the author is associated with is long IBM and JPM.

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