UBS Writes Down $19 Billion – Why Did it Rally?

Apr 2, 2008: 6:44 PM CST

UBS (UBS), a major financial and investment company with headquarters in Switzerland, announced April 1st that it will write down another $19 billion dollars in ‘sub-prime’ investment losses, yet their stock rallied sharply on this news. Why?

According to a New York Times article yesterday, which was one of many sources to report this development, UBS has written off a total of $37 billion since the start of 2007 in losses due to the ‘credit crunch’ and the sub-prime markets.

As a logical investor or trader, your first instinct was probably to ‘get short’ this stock because it’s going to plummet! Unfortunately, the market just isn’t that simple, and the seemingly obvious play often is anything but.

First, Wall Street hates uncertainty. Investors were unsure how much UBS was going to report as losses, and so that likely caused them to sell stock and wait for ‘better news’ or at least wait until a clearer picture emerged before putting that capital back to work. Recall that the Stock Market is a discounting mechanism, and often anticipates future news or releases well in advance of their announcement. In other words, this news was already priced into the shares prior to the actual announcement.

Second, now that the numbers were released, a clearer picture emerged and perhaps the figure was not as bad as anticipated. Either way, the market prefers clarity (even if the news is bad) to murkiness. That was helpful to investors.

Third, UBS reported that it will be raising $14 billion in ‘fresh’ capital (and Lehman Brothers, another financial/investment company, will be raising $4 billion through stock offerings), which means that the new capital will help cover some of the losses and will likely be put to use effectively by mangers who are aware of the lessons of the past. This move may also have been generally unexpected by market participants, which increased demand for the shares.

Fourth, I suspect the rampant bearishness on the financial industry has caused more than a few hedge funds to be net short financial stocks, and when large volatility upward moves like this occur (or a stock violates its technical 20 period moving average), then these funds are forced to buy back shares to ‘cover’ their short positions. I’m sure that added to stock demand.

Fifth, traders may be using this news to anticipate a ‘bottom’ in the financial market and expect prices to reverse from here. The New York Times article addresses this point by saying, “Even so, some analysts say that the optimism may be premature, reflecting wishful thinking more than economic realities. ‘The market has been consistently wrong each time they tried to find a bottom,’ said Meredith Whitney, an analyst at Oppenheimer & Company.”

I’m sure there are many other reasons why UBS rallied when the news (headline) appeared on the surface to be so bearish. Refer to my earlier post entitled “Why Might a Stock Fall on Good News” which actually took the opposite side of this situation, but recall that stocks can rise on bad news for the same reasons.

Don’t be discouraged or frustrated – use such situations as a chance to realize that when the market does the exact opposite of what you think it “should” do, then that is often a more powerful signal to tell you to heed what the market is doing and trade (if you’re willing) in that new and unexpected direction.

4 Comments

4 Responses to “UBS Writes Down $19 Billion – Why Did it Rally?”

  1. boredtrader Says:

    I think another contributing factor, in addition to those you mention and i agree with, is that the combination of Cramer’s retarded restore the uptick rule/bear raid rants & LEH/Guv’mints “investigations” in short sellers probably put the cabash on the unabashed shorting of the worst sector in the markets… for a day or two.

  2. Jack Says:

    This is not a divergence. Price has not make a lower low VS the MACD. You abuse of the term. A Positive Divergence occurs when MACD begins to advance and the security is STILL IN a downtrend and makes a LOWER reaction LOW. MACD can either form as a series of higher Lows or a second Low that is HIGHER than the previous Low. You see divergences everywhere !!!

  3. Corey Rosenbloom Says:

    BoredTrader,

    Haha, yes I remember hearing about Cramer’s rant that shorts are now destroying the market because of the new uptick elimination rule. Right, perhaps some funds reacted to Cramer but I doubt it was a wide-spread phenomena. Oh, that Jim Cramer.

  4. Corey Rosenbloom Says:

    Jack,

    I haven’t mentioned a divergence in this post, but merely indicated growing positive momentum by drawing the arrow. I actually didn’t address that at all. It’s not a divergence but a sign that momentum is increasing and is a positive development. While you can see that in the chart just as easily, indicators can be a crutch for the eye. Although I didn’t say so (I didn’t even analyze the chart), I was also highlighting the red signal line has now turned positive and appears set to cross the Zero line. Also recall that this is not the standard MACD indicator settings so it gives a different picture.