From Bailout to Wipeout

Includes: TGT, WMT
by: The Mole

So, the downward spiral in equity prices resumes afresh. Just like the modern city dweller who is now incapable of strolling 100m without the aid of an over-priced and over-hyped “isotonic” drink for fear of dehydration, so it is with the market, which stumbles without its daily fix of bailouts and stimuli.

As a trader, I rate stock analysts (with a few notable exceptions, i.e., Meredith and Mayo) a notch below accountants in the overall food chain. How they failed to foresee this collapse in earnings really makes me wonder if their IQ rises above room temperature. Big-cap stocks are under pressure because the dollar has gone from 1.60 to 1.28 versus the euro and the USD index is on a rampage.

Just as those companies that earned a lot of their revenues overseas outperformed the market while the greenback was weak, so the opposite now applies. Now that overseas sales are worth less in $ terms, they are suffering a double whammy. Big tech is getting whacked from a lack of capital expenditure as that BIG I.T. project is the first thing to get slashed when the whip comes down.

In the big picture though, what we are witnessing is the perfect storm. The bubble-bursting, great deleveraging of 2008 is taking no prisoners. The full blown unwind in equities, the mass exodus from emerging markets, the dump in higher yield currencies and the rout in commodities is in full swing, and it’s a Canute-like exercise to stand in the way. The faux loosening in LIBOR/EURIBOR fooled many, but even that seems to be stalling.

Today’s Market Moving Stories

  • The New Zealand Central Bank slashed rates by an aggressive 1% overnight (albeit from the lofty heights of 7.5%). Recall how the rate cut by their Aussie counterparts was the precursor to a global, coordinated round of rate cuts last time around? In Europe, Sweden’s Riksbank is the first of the traps today with a 1/2% cut. This is larger than the ¼% that was expected.
  • In a similar vein, ECB council member Gonzalez-Paramo told the Irish Independent newspaper that the bank could lower interest rates again “without adding to inflationary risks”. Looks like we are a shoe-in then for a rate cut on Nov 6th, if not before. The question is whether there will be ¼ or a ½. 25bp’s hardly seems worth getting out of bed for. Meanwhile, his boss J.C Trichet was imploring banks to get back to the business of lending money to each other.
  • Two more German banks (West LB and HSH Nordbank) are considering taking the Teutonic silver and availing themselves of the German federal government’s bailout package. Meanwhile, Greece’s six largest banks have signed up for their governments EUR 28bn rescue deal. Wasn’t it as recently as 2 months ago that the ECB saw little or no effect from the credit crisis on European banks?
  • Belarus has become the latest country to seek help from the IMF. So much for J.C. Trichet’s other crass prediction that demand from the emerging markets would replace that from the U.S! Cue “Don’t cry for me Argentina”. Rampant risk aversion = repatriation from emerging (read “submerging”) economies with the USD and the yen the main beneficiaries.
  • Wednesday’s EIA report was bearish on oil prices as it reported higher than expected stockbuilds for crude and distillates.
  • Even discount retailers such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are showing significant declines in household purchases. The CEO of Wal-Mart even noted what he called “worrying changes in people's patterns of buying” i.e. consumers buying baby milk powder at the very start of the month when they get their paychecks.

The Cowboys in the Last Chance Saloon

The WSJ is reporting that the Bush administration’s latest and perhaps last gambit is a proposal to help forestall foreclosures. This would be in the form of the government giving the banks a financial incentive to turn troubled loans into more affordable mortgages. The Federal government would then be in the hole, ready to share any future losses on these “new” loans with the banks.

The fact that so many of these very loans have been repackaged, sliced, diced and leveraged off in exotic (toxic) CDO’s, MBS’s, etc., would make unravelling and getting back to a granular level with these individual loans very challenging methinks. Put simply, in many cases it can be quite difficult to know who even owns an individual mortgage. Plus, the whole government package is only mooted to be worth a puny $40bn.