The impressive 9 per cent gain in the share price of US government-sponsored mortgage giant Freddie Mac on Wednesday – just after it announced a mega $5.5bn capital raising – is a small reminder of how deeply the “Pollyanna syndrome” (“Yoh! Always look on dah bright side, man!”) has taken hold among investors. From macroeconomic data to corporate results, it seems investors now leap on the phrase “not as bad as expected” as code for “get in there and buy”.
This syndrome is perhaps best summed up in Citigroup’s extraordinary performance on the stock market last month, just after it posted its second consecutive quarterly loss, on writedowns of about $12bn. Revenue fell by almost half, but “that was better than a number of analysts predicted,” noted the FT, attributing the share price rally to investor sentiment that Citi’s results were “worse than broadly expected but better than some feared”.
Not only that. Citi’s quarterly loss capped a week of abysmal results from US banks and financial companies, featuring massive losses, writedowns and capital raisings, including from Wachovia, Merrill Lynch and regional US banks; yet, financial stocks generally rose solidly “cantering” to the week’s end.
The bottom line, obviously, is all about expectations – illustrated perfectly in the euphoria generated in early May by what would, in a different economic climate, rate as deeply unimpressive US jobs numbers.
“US job cuts not as bad as feared”, ran the FT headline on the report that the US lost 20,000 jobs in April – the fourth consecutive month of losses. However, noted the FT, “overall job losses were far less severe than most economists had feared, adding that the unemployment rate dipped from 5.1 per cent to 5 per cent after economists had forecast the rate to rise to 5.2 per cent.
To add some good cheer, the FT quoted John Ryding, chief US economist at Bear Stearns, saying the employment data “continue to point to the economy being in recession but, at this point, the recessionary forces from the overall labour market do not appear to be intensifying.” Get the champagne out.
And this week, Pollyanna investors kicked off with news that MBIA, the world’s biggest bond insurer, had posted a $2.4bn loss, suggesting the slump in mortgage-related securities shows little sign of easing. Its unrealised losses from derivatives were a staggering $3.58bn amid ongoing credit market deterioration. Yet, as the FT reported, MBIA shares rose by 5.4 per cent to $9.94 “as traders took the view that the disclosure of losses meant the worst was over for the embattled company”.
On Wednesday, France’s BNP Paribas announced a 21 per cent fall in Q1 net profit, although, the FT reported, “the figure was not as bad as many had feared and the shares pushed 4.9 per cent higher to €70.78”.
As for Freddie, news of the company’s massive capital-raising plan was hardly the sort for “existing shareholders to fall in love with”, notes David Gaffen on the WSJ’s MarketBeat blog on Thursday. Then again, he says, when solvency is about as important as dilution, if not more, investors are buying into Freddie as it continues to shore up its balance sheet during a difficult run for the mortgage company.
It seems in this environment that a struggling company’s ability to release news that can be charitably called “less bad than before” carries some cachet with investors. “We believe Freddie has turned the corner and is now a revenue growth story. This does not mean we have seen the worst in credit costs, but it does mean that revenue growth will be significantly stronger than the growth in credit costs,” write analysts at Fox-Pitt Cochran, who upgraded shares to outperform.