MarketView for October 23

Summary

The equity markets were lower on Wednesday as shares of Caterpillar fell on reported lower earnings, ending the S&P 500's four-session streak of record high finishes. The fortunes of Caterpillar and Boeing, two components of the Dow Jones Industrial Average, illustrate the quarter's mixed picture of corporate results and outlooks, which have some investors worried.

Caterpillar was one of the largest decliners on the S&P today, falling 6.2 percent to $83.62 after the manufacturer cut its full-year outlook for a third time and its profit missed expectations. That sent shares tumbling by the most in a day since September 2011.

On the upside, Boeing rose 5.3 percent to $129.02 after Company reported better than expected adjusted profit and an increase of its full-year forecast.

After the market closed, AT&T reported revenue that was slightly below Wall Street's estimates, according to Thomson Reuters I/B/E/S.

About one-third of S&P 500 companies have reported thus far, with 66.3 percent topping profit expectations, a rate that is slightly higher than the historical average. Roughly 54 percent have exceeded revenue estimates, below the 61 percent long-term average. The concern on the Street is that much of the growth in earnings has not been generated by revenue.

The semiconductor sector fell 3.4 percent a day after Broadcom, Altera and RF Micro Devices joined Intel and Texas Instruments in lowering their guidance. Broadcom fell 2.9 percent to $26.36, Altera lost 13.5 percent to $32.30 and RF Micro lost 8.6 percent to $5.63.

Global equity markets weakened as China's primary short-term money rates rose on concerns the People's Bank of China may tighten its cash supply to counter inflation risks, which could hurt growth in the world's second-largest economy. Also weighing on sentiment, the European Central Bank said it would put major euro zone banks through rigorous tests next year to build confidence in the sector. If the review reveals unexpected problems, investor confidence could be undermined.

More Problems at Bank of America

Bank of America was found liable for fraud on Wednesday on claims related to defective mortgages sold by its Countrywide unit, a major win for the government in one of the few big trials stemming from the financial crisis.

Following a four-week trial, a federal jury in Manhattan found the bank liable on one civil fraud charge. Countrywide originated shoddy home loans in a process called "Hustle" and sold them to government mortgage giants Fannie Mae and Freddie Mac, the government said. The jury also found former Countrywide executive, Rebecca Mairone, liable on the one fraud charge facing her.

The ensuing penalty is being left to U.S. District Judge Jed Rakoff. The Department of Justice has said it would ask Rakoff to award up to $848.2 million, the gross loss it said Fannie and Freddie suffered on the loans. Bank of America bought Countrywide in July 2008. Two months later, the government took over Fannie and Freddie.

Wednesday's verdict marked a major victory for the Justice Department, which has come under criticism for failing to hold banks and executives accountable for their roles in the events leading up to the financial crisis.

The lawsuit stemmed from a whistleblower case originally brought by Edward O'Donnell, a former Countrywide executive who stands to earn up to $1.6 million if the government prevailed.

It centered on a program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle" - that government lawyers said Countrywide started in 2007 as it sought to move away from subprime lending and issue prime loans. Prime loans are considered less risky than subprime. But the Justice Department said fraud and other defects were rampant in HSSL loans, because Countrywide eliminated loan quality checkpoints and paid employees based on loan volume and speed.

The Justice Department said the process was overseen by Mairone, a former chief operating officer of Countrywide's Full Spectrum Lending division. Mairone later became a managing director at JPMorgan Chase.

The case is U.S. ex rel. O'Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422.