Goldman Sachs Removes Extra Space Storage from Conviction Buy List; Lowers PT (EXR)

On Tuesday, Goldman Sachs announced that it has removed Extra Space Storage, Inc. (EXR) from its Conviction Buy List.

The firm has maintained a “Buy” rating on EXR, and has lowered the company’s price target from $51 to $50. This price target suggests a 12% upside from the stock’s current price of $43.94.

Analyst Andrew Rosivach commented: “We think the stock is inexpensive on forward 2018E AFFO, but the higher 2014E multiple may require the stock to consolidate.”

Extra Space Storage shares were down 21 cents, or 0.47%, during Tuesday morning trading. The stock is up 21% YTD.

Down and Out in Memphis; Movin’ On Up in Salt Lake City

Location, location, location, goes the old adage—usually indicating that the geography of the pricey real estate you are considering buying justifies its expense.

But a comprehensive new Harvard-Berkeley study suggests that location may be even more important to the poor if they are to have a crack at rising to the middle class or beyond.

To put it simply, geography is destiny when it comes to social mobility—more so at least than tax credits for the poor, heavy taxation of the rich, the presence of universities, affordability of tuition or proximity to extreme wealth.

The researchers found that proximity to middle-class areas in particular made intergenerational upward mobility likelier; a strong K-12 school system, higher test scores and lower dropout rates also helped; and, “some of the strongest predictors of upward mobility are correlates of social capital and family structure. For instance, high upward mobility areas tended to have higher fractions of religious individuals and fewer children raised by single parents,” the study found.

In its Monday edition, The New York Times assembled the researchers’ data to create an interactive map that shows where the poorest Americans have the greatest shot at upward mobility and where they remain most stratified.

Among large American cities, a child raised in the bottom fifth in family income had the greatest chance of rising to the top fifth in Salt Lake City (11.5%), Seattle (10.4%) and Pittsburgh (10.3%). Mobility was also present in some of America’s largest metropolises such as Boston (9.8%), New York (9.7%) and Los Angeles (9.6%).

Mobility opportunities were smallest in cities of the South and industrial Midwest such as Memphis (2.6%), Atlanta (4%), Charlotte, N.C. (4.3%), Indianapolis (4.8%), Detroit (5.1%) and Columbus, Ohio (5.1%).

Apart from major cities, some of the most radically upwardly mobile areas are seen in North Dakota, such as Williston (33.1%), center of that state’s shale boom. The most radically stratified non-urban areas are scattered through the Deep South and in remotest Alaska, such as Nome (2.2%).

Using the Times’ interactive data, one can see that a child who grows up in Chicago in the 10th percentile in family income ends up on average in the 34th percentile in income, lower than someone in Dallas (35th percentile), Los Angeles (40th) or Williston, N.D. (59th)—but a better average outcome than a child from Memphis (28th), Cincinnati (32nd) or Baltimore (33rd).

The researchers emphasize that their data are correlational rather than causal.

“What is clear from this research is that there is substantial variation in the United States in the prospects for escaping poverty. There are some areas in the U.S. where a child’s chances of success do not depend heavily on his or her parents’ income. Understanding the features of these areas—and how we can improve mobility in areas that currently have lower rates of mobility—is an important question for future research that we and other social scientists are exploring,” the researchers state.

---

Check out 10 Best Cities for Job Seekers on ThinkAdvisor.

Detroit Makes History. Now What?

Detroit has assumed its place in US history as the largest-ever municipal bankruptcy. Despite its massive size and the infamy of the event, the impact on the broad municipal market impact is expected to be negligible.

Detroit assumed its place in US history as the largest-ever municipal bankruptcy. Despite its size (Detroit estimates its liabilities at $18 billion) and the infamy of the event, the broad municipal market impact is expected to be negligible .

Sooner Than Expected, But Not Unexpected

Detroit's Chapter 9 filing on July 18, although sooner than expected, was in no way a surprise to the market. The filing came one month after emergency manager Kevyn Orr's June proposal to pay creditors pennies on the dollar in settlement of debt totaling $11.5 billion. Many viewed Mr. Orr's plan as a prelude to bankruptcy from the outset. For more detail, see our recent thoughts on this subject in "Distress in Detroit."

The proposal met with tough opposition from creditors (we had our own say on this matter) and legal action from pensioners also facing severe haircuts. In fact, a motion filed in state court the same day by a pension fund seeking a temporary restraining order to prevent the filing appears to be the catalyst for the sooner-than-expected event .

What Happens Next?

The city now has to convince a bankruptcy court that it is insolvent and eligible for Chapter 9 protection. Creditors will likely argue the city is not insolvent, pointing to current cash flow and assets owned (which are potential candidates for liquidation).

Bottom line: This is going to be a long and protracted battle, with court challenges along the way. The Chapter 9 filing is but the first chapter in what is sure to be a lengthy negotiation that could offer no clarity for years. It is likely to become a very expensive exercise for the already fiscally barren city .

For the broader municipal market, we do not anticipate a widespread systemic effect and investors shou! ld expect little market impact. The city's problems, while long known to the municipal market, have had little bearing on it – a scenario we expect will continue.

While some indirect action such as outflows or price weakness could ensue in the near-term as the market digests the news, we would remind investors that headlines rarely tell the whole story. The basic fundamental credit underpinnings of the municipal market remain very healthy and, in fact, better than they were in 2008.

Detroit Is the Exception, Not the Rule

For those fearing a Detroit repeat elsewhere in the US, we would submit – there is no reason to panic. Detroit's situation is unique, as indicated by the emergency manager's own assessment :

The city's population has declined 63% since its 1950 high and 26% since 2000.Unemployment peaked at a startling 23.4% in June 2010, up from 6.3% in 2000, and remained at an elevated 18.3% in June 2012.Detroit's violent crime rate is five times higher than the national average and the highest of any large city.Approximately 40% of the city's street lights are not functioning; 78,000 structures and 66,000 lots are abandoned and blighted. Arson is prevalent, with 12,000 fires each year, 60% in derelict or unoccupied buildings.Detroit's general fund deficit currently stands at $375 million, or roughly $700 million when adjusted for recent deficit borrowing. That's within the context of a $1 billion fiscal year (FY) 2014 budget. The city had projected negative cash flow of $198 million in FY 2014, and by the end of FY 2013, will have deferred $100 million in pension funding.Municipal bankruptcies are rare, but not unprecedented. And while the federal government has already indicated a reluctance to intervene, Michigan may step in to protect the creditworthiness of the state and its municipalities, and to ensure fair treatment of all interested parties. We hope it will take action to do so, following the example of other states before it (consider Rhode Isl! and in th! e case of Central Falls). In our view, the state's failure to act could cost Michigan and its municipalities much more in the long-term than Detroit saves today.

Peter Hayes, Managing Director, is head of BlackRock's Municipal Bonds Group and a member of the Americas Fixed Income Executive Team.

Will "Black Sails" Help Starz Navigate TV's Choppy Waters?

First, Netflix (NASDAQ: NFLX  ) decided it wanted to HBO. Now, Starz (NASDAQ: STRZA  ) wants a piece of the action with an original program called Black Sails, due to air next January.

Starz pulled out the stops at San Diego Comic-Con with a large booth populated by a replica pirate ship meant to give visitors a feel for the show. Starz treated fans to a screening Thursday night during the con with music performed by show composer Bear McCreary, whose other credits include the reimagined Battlestar Galactica and The Walking Dead.

The show, set 20 years before Robert Louis Stevenson's classic book Treasure Island, focuses on pirates who face enemies all about as they fight to preserve a criminal haven known as New Providence Island. Executives no doubt hope the series and its dark undercurrent proves appealing to the tens of millions who have taken to Game of Thrones and The Walking Dead.

There's merit to the plan. Offbeat and edgy original programming has proved to be an attractive alternative to network TV fare in recent years. Black Sails fits the mold.

Starz also needs the help. Revenue growth has gone missing as debt has ballooned since 2011. Meanwhile, Netflix's sweeping deal with Walt Disney means the network won't have access to Marvel, Star Wars, and other popular properties come 2016. Executives have until then to develop a cost-effective portfolio of originals and licensed programs capable of igniting growth.

Unfortunately, there's no guarantee that original programming will pay off. Look at Netflix. For as good a draw as House of Cards was, the new Arrested Development failed to draw even a million new members. Netflix shares sold off as a result, and that's in spite of a significant earnings beat.

So while I'd love to believe Black Sails will take TV's treasure island, as an investor, I'd rather add Starz to my watchlist. Here's how you can do the same.

Who will win the $2.2 trillion media war that's pitting cable companies against technology giants? The Motley Fool's shocking video presentation reveals the secret Steve Jobs took to his grave and explains why you need to be looking at these three power players that film your favorite shows. Click here to watch today!

Good News for Ford and GM in Europe

Ford (NYSE: F  ) and General Motors (NYSE: GM  ) have had a terrible time in Europe recently. Each lost nearly $2 billion in the region last year, and both are expected to lose big again in 2013. Turnaround plans are under way, but continued declines in Europe's new-car sales have raised doubts about their chances of success.

But some good news for a change: Sales were up slightly last month, amid signs that the situation is stabilizing. In this video, Fool contributor John Rosevear looks at the state of the European new-car market -- and at why the latest developments bode well for the bottom lines at both Ford and GM.

Improving conditions in Europe are just one of several good reasons to think that the Blue Oval still has big growth opportunities ahead. We've outlined those opportunities in detail, in the Fool's premium Ford research service. If you're looking for some freshly updated guidance to Ford's prospects in coming years, you've come to the right place -- click here to get started now.

Procter & Gamble Stock Tops the Dow

Up and down the markets go in a tumultuous week for stocks across the globe. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has recovered from deep losses today and nudged into the green, helped by Procter & Gamble's (NYSE: PG  ) big gains. The blue-chip index is up a meager five points as of 2:20 p.m. EDT after suffering nearly triple-digit losses this morning. Still, concerns over the future of quantitative easing continue to spread investor doubt, and most of the Dow's members are in the red. Let's check out what Procter & Gamble's doing to beat back the Dow's losses and why most stocks are falling again today.

P&G soars despite stimulus fears
Today's report of a 3.3% gain in durable-goods orders beat expectations and showed that manufacturers are still succeeding despite tax increases and budget cuts. That wasn't enough to fight off stimulus fears, however, after Federal Reserve Chairman Ben Bernanke's comments to a congressional committee indicated that the central bank could slow stimulus bond-buying later in the year. Easing will have to end eventually, but Wall Street doesn't see it that way yet. Bernanke did caution that slowing easing too soon could jeopardize the economy's recovery, however, so fear over the end of "QE infinity" looks premature.

Procter & Gamble hasn't given in to the pessimism, however: Its stock has gained 4% to lead the Dow higher. The company is bringing back former CEO A. G. Lafley when current chief executive Robert McDonald departs at the end of June. Lafley oversaw P&G's strong growth from 2000 to 2009, and his rehire has ignited investor optimism, which has dwindled over the company's lackluster past few years. McDonald has aimed to cut costs and increase market share during his time, but his efforts to steer P&G out of the depths of the recession haven't been enough for investors. Lafley has promised no major changes to P&G's strategy, but his hire has immediately created a spark.

Procter and Gamble is outnumbered on a Dow dominated by laggards, but no stock is losing so much as Hewlett-Packard (NYSE: HPQ  ) . Shares of the tech giant are down 2% today as part of a correction after yesterday's massive double-digit rise. Earnings beat expectations and sparked yesterday's surge, but investors shouldn't place too much faith in HP's turnaround just yet. The company might be topping Wall Street's projections through cost-cutting, but slumping PC sales still dominate HP's financial woes. Until HP can successfully transition away from PCs into more lucrative areas such as mobile and cloud computing, investors should expect more ups and downs from this troubled stock.

Verizon's (NYSE: VZ  ) stock also ranks among the biggest Dow laggards, with shares down 1.1% today. The telecom firm released its Verizon Cloud data backup system for iOS users yesterday after launching the app for Android users last month. The app is a part of Verizon's focus on cloud technologies as it looks to solidify its hold on mobile wireless users. The company's partnership with Nokia's Lumia 928 phone should help to attain that goal if the Windows phone takes off and secures a niche outside of Android and iOS platforms.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP is rapidly shifting its strategy under the leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor detour on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

Bank of America Case Burns JPMorgan Chase

In the swirl of lawsuits facing the big banks over mortgage-backed securities, things can change seemingly on a daily basis. A recent example can be found in the sudden settlement between Bank of America (NYSE: BAC  ) and mortgage insurer MBIA (NYSE: MBI  ) , a squabble that had been brewing for some time, with no apparent end in sight.

Now, a suit AIG (NYSE: AIG  )  is pursuing against B of A has opened up a can of worms for peer JPMorgan Chase (NYSE: JPM  ) , as the judge in the latter case has cited the former litigation as proof that he had no jurisdiction to throw out claims by Dexia that MBSes it bought from Bear Stearns, Washington Mutual, and, on its own and as purchaser of those two entities, JPMorgan.

Venue change makes all the difference
The change stems from the fact that a New York appeals court is allowing the larger AIG v. Bank of America suit to be heard in state, rather than federal court. In the Dexia case, the judge used the Edge Act, which makes a distinction between domestic and foreign banking activities, to throw out the bulk of Dexia's case against JPMorgan.

But AIG's tenacity in its mission to recoup some of its crisis-era losses has spurred the megainsurer to push its case concerning $10 billion of crummy MBSes against B of A, despite a supposed vow to the latter by the New York Fed that the bank would not be responsible for such claims.

The decision to move the AIG case to a state rather than a federal venue was a big win for the insurer, and a blow to B of A. Now this complaint is proving to be a problem for JPMorgan, too.

Just the beginning?
Though the Dexia v. JPMorgan lititgation involves a small number of disputed securities -- 65 in all -- with a relatively small overall value of $774 million, this case is obviously important. At the time of the original ruling, the decision was hailed as a boon to big banks, which would now be considered immune from similar lawsuits.

JPMorgan apparently saw the suit as significant, as well, or it would not have put such time and effort into fighting it; given its small size, it surely would have been much cheaper to settle. Unfortunately for the big banks, this litigation news looks like the well-worn road of toxic MBS lawsuits just got a lot longer.

With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or if finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether JPMorgan is a buy today, check out The Motley Fool's premium research report on the company. Click here now for instant access!

Why the Street Should Love CareFusion's Earnings

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on CareFusion (NYSE: CFN  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, CareFusion generated $628.0 million cash while it booked net income of $320.0 million. That means it turned 17.3% of its revenue into FCF. That sounds pretty impressive.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at CareFusion look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 24.8% of operating cash flow coming from questionable sources, CareFusion investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 16.8% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 12.9% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

If you're interested in companies like CareFusion, you might want to check out the jaw-dropping technology that's about to put 100 million Chinese factory workers out on the street – and the 3 companies that control it. We'll tell you all about them in "The Future is Made in America." Click here for instant access to this free report.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add CareFusion to My Watchlist.

Getting Rich from Military Technology, Part I

When you listen to military communications, a lot of words are slang, and actually have quite distinct meanings. For example, there was this time, long ago during my Navy days, when my squadron was working up out at NAS Fallon, Nevada. ("Working up" is Navy shorthand for getting everyone qualified to deploy.)

We were out on a bombing range, flying a racecourse pattern, taking turns rolling inbound on a practice stretch. We would line up, release our weapons one at a time and then get graded on bombing accuracy. Eventually, I made a radio call and said, "We're Winchester, bingo, RTB Fallon."

Huh? What did I say? Basically, I told the controller that we had dropped all our bombs, were out of ammunition ("Winchester"), were low on fuel ("bingo") and had to return to base ("RTB") at Fallon. The idea in Navy communications is that you want to keep it short and pack a lot of information into your calls.

The Vampire Call

Out on the front lines — out where the gray ships deploy — there are all manner of other coded words specific to the deployment area and any perceived threats. There's one call, however, that strikes fear into everyone's heart… the "vampire" alert.

A radio call of "Vampire, vampire" does NOT mean that there's a teenage movie about underage girls who fall in love with guys from Transylvania on the ship's TV system.

No, the "vampire" call means that there's a missile inbound, moving at high speed toward the aircraft carrier or its battle group. Somebody, somewhere has shot a missile at your floating home away from home. In the days of the Cold War, the battle-space problem was Soviet missiles.

Out in the Western Pacific, where I deployed, the Russians typically sent out swarms of gigantic Tu-95 Bear bombers, which carried missiles the size of small airliners.

It used to threaten the fleet with long-range missiles.
Now, this Bear is a museum piece.
BWK Photo, Monino Air Museum, Moscow

Or sometimes, there were Soviet surface ships loaded with batteries of supersonic missiles designed to kill carriers. Or it could have been the formidable Oscar class of submarine, also stuffed with missiles that it could launch underwater.

One thing was for sure, however. If you were out flying around and saw a missile trail, you were supposed to hit the microphone key and shout, "Vampire!" The idea was to get everyone's attention at the speed of light. You wanted to get the tracking radars pulsing and quickly to find those killer pipes trailing fire.

What then? Our doctrine was that the battle group would react and, at first, attempt to jam the inbound "vampires" with electronic countermeasures, or spoof the rockets with chaff and flares. Or perhaps if that wasn't working, one or more of our destroyers or cruisers would fire missiles to shoot down the incoming bad guys.

As a last-ditch measure — when reaction times were down to fractions of a second — all of the Navy ships had one or more Phalanx Close-in Weapon Systems (CIWS), which are high-speed Gatling-type guns for putting a wall of shells in front of those enemy missiles. Whatever works, right?

As we went through our drills out on deployment, many were the times when we sat around the ready room discussing how to defend against those Soviet missiles. Wouldn't it have been nice to have something like those "phaser" systems, like in Star Trek? Dream on, right?

And what of today? Is there still a missile problem out there? Do battle group commanders and sailors up and down the line still worry about "vampire" calls? Well, in the past 22 years since the end of the Cold War, the missile threat has actually gotten worse, what with arms proliferation across the globe. We're still waiting for that Star Trek defense.

Hold that thought.

The Russian's "Missing Elements"

Speaking of the Russians, in 1869, Russian chemist Dmitri Mendeleev categorized all of the elements then known to science, based on atomic weight and other properties. He laid out the elements, lightest to heaviest on a table. In the process, Mendeleev noted several gaps. It appeared that some elements were just… missing.

Mendeleev's original table, with "missing" elements.

Changing the Nature of Computing and Warfare

Today, nearly 145 years later, one of Mendeleev's "missing elements" holds the key to a technological revolution, a profitable technological revolution.

This element — long since discovered — forms the foundation to a recent breakthrough that will revolutionize the world of digital computing, and even change the nature of weaponry and war.

We're literally on the ground floor here. This tech is so new that it's scarcely out of the lab. Indeed, the only samples of this new tech come from specially built bench-model systems. But that's about to change, because, as you likely know from cellphones and flat-screen televisions, great new tech ideas seldom remain hidden in the shadows for long.

This new tech breakthrough will create vast new fortunes, upturn entire industries (and create new ones, too) and give sleepless nights to corporate strategists and military planners across the world. What is it?

Find out tomorrow in Part II of this story…

Best,
Byron King

Helicopter Jon to the Rescue as S&P 500 Gains Most in Four Weeks

It’s a bird! It’s a plane! It’s Jon Hilsenrath, doing his best Superman impersonation to lift the stock market on his back before the Fed announcement tomorrow.

Associated Press

The S&P 500 rose 0.8% to 1,998.98, its biggest gain in four weeks, while the Dow Jones Industrial Average gained 0.6% to 17,131.97. The Nasdaq Composite advanced 0.7% to 4,552.76 and the small-company Russell 2000 finished up 0.4% at 1,150.97.

Sure, there was economic data today–producer prices didn’t budge in August, a sign that inflation might not be a worry after all–but the market did little today until a video of the Wall Street Journal’s Jon Hilsenrath, who is often thought to be a mouthpiece for the Fed, hit the web. The resulting bounce caused the Lindsey Group’s Peter Boockvar to dub today’s move”Jon Hilsenrath” rally:

This is a Jon Hilsenrath stock market rally. In a webcast done on WSJ.com, Jon Hilsenrath (just a reporter but one who speaks to many Fed officials) is making the argument that since the economic data hasn't changed much since the July meeting, the Fed will likely keep "significant underutilization" of labor market resources comment in the statement. On the "considerable time" wording, he thinks it stays in the statement but will be qualified as the Fed doesn't want to send any signals on WHEN rates may go up. As I said this morning, a potential "considerable time" change in the wording is just semantics and focus more on whether "significant utilization" stays in or not.

Birinyi’s Rob Leiphart considers the possible changes and what their impact could be:

The last time rates were adjusted was on December 16, 2008, however QE was tapered by $10 bil-lion at the last six meetings. Of the 101 economists surveyed by Bloomberg only one is expecting a change in rates (+0.25%).

The focus tomorrow be on the language surrounding the first rate increase and the completing of the quantitative easing (QE), which should be complete as of the next policy meeting in October.

With the focus surrounding the first rate increase, we put together the table to the right. We have provided, back to 1963, the performance of the S&P 500 three and six months before and after the first rate increase.

And here’s the chart. Let’s just hope we’re nowhere near needing it.

Stoxx 600 takes a breather as Erste Bank drops in Europe

LONDON (MarketWatch) — Austria's benchmark equity index slid by the most in four months on Friday, hit hard after market heavyweight Erste Group Bank AG warned of a hefty annual loss.

Erste Group Bank (AT:EBS) tumbled 16% to 19.48 euros ($26.49) after it said it expects to post a net loss of €1.4 billion to €1.6 billion for 2014 as a result of higher provisions for its units in Hungary and Romania. Annual risk costs will be pushed up to €2.4 billion from the previously expected €1.7 billion, said Erste.

Click to Play Fourth of July for the snobs

This Fourth of July, a number of Americans will be doing their partying VIP-style. That's right, even this most fair-minded and fun of holidays has gone glam. MarketWatch's Charles Passy takes a look at some deals on Lunch Break with Tanya Rivero. Photo: Getty

In Hungary, the government is aiming to cut charges by banks on foreign currency mortgages to aid homeowners struggling in the wake of a weakening in the Hungarian forint. Meanwhile, the Romanian National Bank is working to reduce nonperforming loans before an asset-quality review by the European Central Bank.

Barclays cut its rating on Erste to underweight from equalweight. With Erste the most heavily weighed on Austria's ATX, the stock index was pulled down by 3% to 2,460.31.

Erste was also the biggest decliner on the Stoxx Europe 600 index (XX:SXXP) , which shed 0.3% at 347.95. The index had finished the past three sessions with gains.

Trading volume was lower than usual in Europe on Friday as Wall Street closed for the July 4th holiday. The S&P 500 index (SPX)  and the Dow Jones Industrial Average (DJIA)   ended Thursday at record highs , with the Dow industrials closing above the 17,000 level in the wake of a stronger-than-expected U.S. June jobs reports.

In Paris on Friday, the CAC 40 equity index (FR:PX1)  fell 0.5% to 4,468.98, and Germany's DAX 30 (DX:DAX)  gave up 0.2% to 10,009.08.

But seeing gains Friday were shares of EasyJet PLC (UK:EZJ) , higher by 1% after the British budget airline said the number of passengers it carried in June rose 10.1% to 6.1 million, compared with the year-ago period.

EasyJet nearly topped advancers on the U.K.'s FTSE 100 (UK:UKX) . The index overall edged up less than 1 point to close at 6,866.05.

Meanwhile, British government-services provider Serco Group PLC (UK:SRP)  said Friday it lost a rebid to operate the Docklands Light Railway in London. Its shares declined 0.3%. Serco will continue to service the line through Dec. 7. The DLR franchise generated revenue of about 90 million pounds ($ 154.3 million), or 2% of Serco's overall revenue, at a margin that was well below the average Serco logs on its contracts, it said.

Elsewhere in Europe, shares of Let's Gowex SA (ES:GOW)  remained suspended for a second day in Madrid . The shares tumbled more than 70% on Tuesday and Wednesday combined after short seller Gotham City Research LLC said it believes that more than 90% of revenue reported by the free public Wi-Fi provider "does not exist." Gotham City "does not trust Gowex's reported revenues, and believes Gowex is too good to be true," it said, adding that it estimates actual revenue to be less than €10 million.

Gotham City's claims are "unfounded and defamatory," Gowex said in a Thursday statement, and said it's preparing a report of relevant facts to clarify the company's position.

More news from MarketWatch:

EU warns banks against trading bitcoin

At Wimbledon, will a man outside the 'Big Four' finally win?

Hurricane Arthur strengthens, makes landfall on East Coast