Of Stress Tests & IPOs - Ahead of Wall Street

By Zacks | March 27, 2014 AAA

Thursday, March 27, 2014

This morning’s favorable economic data will give the stock market a positive start at the open. But as was the case on Wednesday, the mood may not carry through to the end of the day with results of the bank stress tests and questions about the IPO market stealing the limelight.

We have just a few days left in the first quarter of 2014, but this morning brought the last look at 2013 Q4 GDP and it was a positive revision. The revision isn’t much, but most of it came from the highly desirable consumer spending component. This is good news, but it doesn’t really tell us much about the current and coming quarters. Estimates for Q1 GDP have come down quite a bit, with weather as the big culprit. The expectation in the market is that Q1 GDP growth will be the low point for the year and the momentum will notably improve from Q2 onwards.

The banking sector is dominating the headlines today, with the Fed’s latest round of stress tests for 30 large banks resulting in 25 institutions getting green light to raise dividends and deploy more cash towards share buybacks. The test aims to measure the ability of each of the banks to continue lending in a severe recession. Citigroup (C ) didn’t get the nod, the second time in three years. The Fed didn’t cite any capital deficiency issues with Citi, but pointed out risk management and other qualitative concerns. While this is a big blow to Citi’s market standing and will likely weigh on the stock today, the tests nevertheless show that the Fed’s tough standards are helping strengthen the financial system.

In other developments, King Media (KING) didn’t get the warm reception that other recent IPOs had received, with investors wondering if the Candy Crush maker was just a one-hit wonder and would go the Zynga (ZNGA) way.

The IPO market has been red hot lately, bringing not-so-fond memories for the late-90’s. Back then, investors’ darlings were any IPO that had a dot-com in its name irrespective of whether it made an money or not. We have been seeing something similar lately with investors all over the IPOs of companies that throw around in-vogue Techdom buzz-words like ‘cloud computing’ and ‘big data’. The King Media IPO may not be the beginning of the end of the current craze. But having seen what happened the last time around, we know these things don’t end well.

Stocks have been all over the place this year, but have little to show for that activity. The market ran up strong last year in anticipation of a rebound in economic and corporate earnings fundamentals. The starting point for the hoped-for fundamentals rebound was delayed by this year’s weather. But we are getting close to the stage where we better start seeing improving fundamentals. The market’s recent tentativeness is likely a reflection of nervousness about that outlook.

Sheraz Mian
Director of Research

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