Financial stocks rallied on Monday, pacing the broad market higher as investors remained optimistic about the direction of interest rates.
The Department of Commerce reported that personal spending rose at twice the rate of income, but financial stocks took the news well. The American Banker index of the top 50 banks rose 0.53% on Monday, its 225-bank index rose 0.17%, and the S&P 500 was up 0.51%. An report from J.P. Morgan stated that "the forecast now has the economy slowing to a 3.5% growth pace this quarter," leading it to change its position on a possible rate hike by the Federal Reserve this year. J.P. Morgan had expected a rate increase, and James F. O'Sullivan, an economist at the bank, said that "the limited comeback in consumption was one of the key reasons for the shift in view, and it still holds."
One of the biggest market winners was Donaldson, Lufkin & Jenrette Inc. The investment bank closed at $65.8125, up 4.6875 cents, or 7.67% after Keefe, Bruyette & Woods Inc. increased its target on the company to $85 a share, from $65, and reiterated its "buy" rating. A report from Keefe said DLJ stands to have higher earnings "should the operating environment continue to improve with high-yield issuance gaining momentum while the equity pipeline continues to grow." It noted that Donaldson "already has 14 deals in its nine-week rolling backlog."
Citigroup Inc. led the rally, climbing in early trading after its four-for-three split of common shares took effect. The company went up to $59.125 during trading and closed at $57.875, up 93.75 cents, or 1.65%. Chase Manhattan Corp. and J.P. Morgan & Co. shares also posted added solid gains, rising 1.2% and 0.78% respectively.
Wachovia Corp. shares bucked the trend, ending at $56.8125, down by 0.33%, after the company said it would cut its workforce by about 8.5%.
Elsewhere, Imperial Credit Industries Inc. continued to slide in the wake of an announcement last week that it would have to revise its second-quarter results to a loss of 58 cents. Imperial said an increase to its loan-loss provision of $56.1 million - based on preliminary results of a review by the California Department of Financial Institutions and the Federal Deposit Insurance Corp. - would leave it with a loss of $18.8 million, or 44 cents a share, for the quarter.
"This is not unprecedented, but there is now a credibility gap," said Merrill H. Ross, an analyst at Friedman, Billings, Ramsey & Co. She downgraded Imperial to "market perform" from "buy" last Wednesday but expects the company to stabilize and report per-share earnings of 18 cents in the third quarter, 56 cents for the year, and 80 cents in 2001.
Imperial lost 36.4% last week and closed Monday at $2.0625, down 6.25 cents, or 2.94%.
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