Preview from Europe: Market Rally Was Running on Empty

Stocks retreated yesterday as the euphoria about Obama’s package gave way to a more somber reflection on more layoff announcements (Sony (SNE), Citibank (C), Rio Tinto (RTP), Sweden based SKF, and Molex (MOLX)) and poor earnings outlooks (Nokia (NOK), Texas Instruments (TXI), Broadcom (BRCM), Danaher (DHR) and Samsung (SSDIF.PK)). Bellwether stock FedEx (FDX) fell 16%, hardly an omen of a 2009 economic pickup.

The market is now braced for a horror show retail sales number on Friday. This should debunk the myth of better than expected sales on Black Friday. Sales may have been up by volume but if you are being forced to sell goods below cost you aren’t going to make any profits.

Today’s Market Moving Stories

• Lawmakers have put the pedal on the metal and broad agreement has been reached in the long running auto bailout saga. This has caused Asian bourses to rally overnight.
• The latest installment in the farcical story of the black hole that is AIG(reed) (AIG) is that they have managed to chalk up another $10bn in losses. It must be time for another trip to that luxury spa. They have some neck with news that managers are getting retention payouts topping $4 million! Where is the oversight? Who is minding the purse strings on behalf of Joe the Plumber? Maybe one of the key challenges for the future will be to prevent monstrosities like AIG from becoming “too big to fail” as the alleged economies of scale are dwarfed by the staggering costs of bailout nation.
• German wholesale prices fell the most in 40 years. These are the kinds of numbers one gets during a depression, NOT a recession. Are you watching J.C. Trichet, who seemed yesterday to be hinting of an ill advised pause to recent rate cuts in January?
• The World Bank is even gloomier than the IMF regarding global growth (or the lack of it) in 2009 with a projection of an anemic 0.9%. They go on to predict a contraction in world trade next year. This would be the first such decline in 20 years. No wonder export dependent countries are thinking currency manipulation. But history shows that unilateral intervention is rarely successful.
• In Japan policymakers seem to be getting increasingly fretful about the strength of the Yen with Bank of Japan governor Shirakawa saying the economy was slowing rapidly and that authorities were watching FX moves very carefully. Machinery orders dropped 4.4% and the BoJ’s corporate goods price index saw a dramatic 1.9% fall. The theme of possible competitive interventions to weaken currencies is spilling over into China where the State Council’s Development Research center economist Zhang Xiaoji said that the CNY should be more flexible.
• Note the yield on short dated US Treasury bills traded at negative rates yesterday! Last time this happened was 1929. This is as pure an example as you could get of safe haven buying and banks' refusal to lend.
• Troubled German bank Hypo Real Estate (which bit off more than they could digest by buying Depfa) has tapped the German Federal government bailout slush fund for another €10bn. While there is another €20bn left in the kitty, given their AIG-style cash burn, this may not last long!
• The Irish government is still playing hardball, saying that there will be no extension of the debt guarantee at this stage. At least until the banks have sorted out their capital position and undertaken substantial restructuring. Ironically, probably the only way the banks can sort out their capital position right now is via government assistance. As for restructuring, we are hearing of pressure on management teams from the Irish press, but the restructuring arguably has to go wider and deeper. It could mean the end of the stand-alone status of possibly two banks in Ireland. Whatever happens, it’s almost impossible to see a resolution on this subject before year-end.

And Finally… The Second Of My Picks For Best Bailout Videos Of 2008… “The 12 Bailouts of Xmas”

Disclosures: None

Comments

[prudentinve...:]

Reality does not support the bullish mood we have been seeing. Keep your seatbelts fastened!

2008 Dec 10 08:19 AM

[jclarke32:]

Excellent one of the best I've seen but fear not the Car Czar will save the day! Jim

2008 Dec 10 08:40 AM

[Alan Young:]

I love the car ad--where did you get that? And, right on about PREVENTING companies from getting "too big to fail."

That said, I'm still looking for a nice bear rally--we need it.

2008 Dec 10 09:24 AM

[investor88:]

Agree with the gloomy news to come but the market worldwide is in rally mode, a bear rally. This may go on for some time maybe till 20th Jan 2009 when Obama becomes President. Then re-evaluate from there.

The market is able to dismiss bad news and react to good news, so maybe the bear rally has some legs until it falters again.

2008 Dec 10 09:31 AM

[morph366:]

In the eurozone one should expect to see some scary numbers from countries like Ireland, Greece, Spain and Italy. But Germany is the key territory to worry about as you suggest.
| German wholesale prices fell the most in 40 years. These are the kinds of numbers one gets during a depression, NOT a recession.
Do you see any risk of a dismantling of the Euro monetary system?

2008 Dec 10 10:35 AM

[capeman228:]

I'm so tired of the attitude that American cars are terrible. I wonder how many of the people who make these comments have owned one in the last 5 years. My guess is that most would not be caught dead in an American car, but not for any reason that relates to quality.

Most of my wine and brie friends wouldn't look at an American car because their other friends would think it unsophisticated. Meanwhile my Ford has more room and gets better mileage than its Toyota counterpart. And there are plenty of US models that are superior or equal to the imports.

If Americans think that we can lose our auto industry and things will just go on, they are just silly as far as I am concerned.

The notion that we will survive on services and style and don't need manufacturing is about as credible as the praise for the Emperor's New Clothes.'

And the idea that the transplants are American made is silly; all manufacturing is global now, but when you lose the HQ, and the engineering, and the national identify, you've lost it all.






On Dec 10 09:31 AM investor88 wrote:

> Agree with the gloomy news to come but the market worldwide is in
> rally mode, a bear rally. This may go on for some time maybe till
> 20th Jan 2009 when Obama becomes President. Then re-evaluate from
> there.
>
> The market is able to dismiss bad news and react to good news, so
> maybe the bear rally has some legs until it falters again.

2008 Dec 10 10:36 AM

[Tony Petroski:]

The Golden Mean: a government should stay out of business in general, but it should intervene to prevent companies from becoming too big to fail (Teddy Roosevelt, America's calling). Great comment Mr. Mole.

2008 Dec 10 09:59 PM

[freefall51:]

I got to underline what U 316752 said about American cars.

Being a native German I drove quite a few European cars including BMW, Mercedes, VW with every mainenance bill touching 1000- 2000 DM, say $ 500 - 1000 a shot. And that was 10 years ago.

I then had a Buick (4 x oil change for $25, filters and a rubber belt replacement over 30,000 mi) and an Explorer for 10 years. I never had more robust and inexpensive cars to maintain. Yes, they use more gas but look at the totality of the bills. It would not be good if Ford or its peer companies disappear. But they got to shape up.

2008 Dec 11 12:22 AM

[jhm47:]

American cars are much better than they are given credit for. Our Deville gets 26-30+ mpg on the highway, and our repair costs have been $0 in the 2+ years we've owned it. For a "big" car, that's impressive, and many so-called economy cars cannot begin to touch it. However, the GM execs have to get their poop in a group, or the company will fail. Union workers need to make concessions too.

2008 Dec 11 01:11 PM