Is the market now just a junkie addicted to a diet of bailouts, rescues and stimulus packages? If it doesn’t get its daily fix it collapses.
U.S. indices posted large losses yesterday as several companies missed their quarterly earnings expectations. After the U.S. close, the Japanese market started to get clobbered more (down 6.2%) as the yen strengthened. This was just too much for the share prices of the big exporters [e.g. Canon (CAJ), Honda (HMC) , Toyota (TM)]. Other Asian markets followed suit.
Today’s Market Moving Stories
- Hard pressed hedge funds posted record worldwide losses in September according to data from Eurekahedge. The 2431 global funds it tracks recorded a 4.7% decline on the month and the index is down 7.9% YTD. These kinds of dismal numbers will spark fresh fears of more redemptions (i.e. get your money back while you still can) and another round of forced asset selling.
- The coordinated attempts by global central banks to flood the money markets with liquidity continue to bear some fruit with LIBOR and EURIBOR rates edging down again. The question though: is anyone doing any lending at these rates save for the anointed one JP Morgan (JPM), which may have had the arm put on it to do so.
- BoE governor Mervyn King painted a gloomy picture for the UK economy saying that the country is in a recession and that it could be sharp and prolonged. The man’s a genius.
- Former billionaire (he’s probably just a plain vanilla millionaire now) Kirk Kerkorian was in the news yesterday for all the wrong reasons as he started to dump his lumpy holding in Ford (F) at a 66% loss. Ouch.
- The global de-leveraging and risk aversion saw the euro crash to $1.28. Triggered stops and some very bad big bets increased the fall. Crude dipped below $70 a barrel and the Baltic Dry Index (of shipping demand) fell for the 12th straight day. The yen and the dollar will always be the big winners in such an environment.
Earnings Estimates Revised Downwards
Stock prices are determined by future earnings power. One has to be wildly skeptical about the behind the curve equity analysts predicting double digit growth when we are in what looks to be a serious recession.
Estimates for the S&P 500’s 2009 earnings have dropped from $81.52 in March this year to just $48.52 now. That’s a drop of 40% in seven months! See this list for S&P 500 earnings since 1960. The last time they were below $50 was 2002. So it’s perfectly reasonable to think that stock prices will fall back down to their 2002 levels as well.
Globalization = Contagion
Worrying news from Latin America and further evidence of my “globalization = contagion” thesis overnight. Argentina seized $29bn of private pension funds. This will terrify global investors and stoke concerns of another sovereign default by the country, as they have effectively stolen this money. Their stock market was down 11% yesterday.
There is little or NO liquidity in Latin American currencies at the moment. It is virtually impossible to get any money already invested in those countries OUT. This once again proves the truth of my oft referred to remark that emerging markets are like a barn door on the way in, but an arrow slit on the way out. Eye of the needle indeed.
Note the rally in U.S Treasury and euro government bonds in the past 24 hours. Risk aversion is back and this is usually very bad news for equities.
Today we get the minutes of the October MPC meeting at 09.30. While I think we will see another ½% off rates in November, look for any dissent in the minutes today i.e. anyone who wanted rates left unchanged. This might help stem the collapse of sterling.
- Germany’s Bayerische Landesbank said it needs new capital. They have gone to the Federal government seeking €5.4bn from the rescue fund. I guess the CEO will have to downsize his lifestyle a bit.
- Chrysler (DCX) is now seeking a saviour in the form of an alliance with Renault and Nissan (OTCPK:NSANY).
- Mitsubishi UFJ Financial Group (MTU) and NEC cut their ½ yearly profit forecast.
- Financial Hanover Re announced a profit warning.
- Dutch bank ING (ING) were downgraded by Moody’s rating agency.
- Goldman Sachs (GS) put Citibank (C) on their “sell” list.