Preview from Europe: Stocks Find Silver Lining

U.S. equities managed to keep their head above water yesterday despite a profit warning from Bank of America (BAC) (recall they now own Merrill Lynch (MER) and Countrywide) and very soft home sales and factory orders. So why the newfound tentative optimism? The bull’s case is that stocks are clearly benefiting from:

• asset reallocation from overvalued government bonds into equities, i.e. a return of risk appetite,
• mortgage rates have slipped below the key 5% level encouraging a pick up in refinancing,
• lower volatility is encouraging investors to dip their toe back into the market,
• a shift to cyclical economically sensitive stocks which may make hay from the Obama stimulus package (e.g. the government doesn’t own bulldozers),
• market strategists talking up a good couple of months ahead for stocks (before they talk it back down a few months later it must be added).

The Euro Stoxx 600 is up 17% since the November 21st low, which has gone almost unnoticed. Goldman Sachs is predicting corporate earnings for this group to decline by 20% on average this year so all may not be so hunky dory. For a great overview of the caveat emptor case, look no further than this earnings estimates piece.

Today’s Market Moving Stories

• The FoMC minutes released last night were a tad frustrating. While they were dovish on inflation and bearish on what they see as an increasingly grim economic outlook they were very sketchy on details of the next step that the markets expect them to embark upon i.e. quantitative easing.
• Will the Obama effect wear off? In the first dose of realism he warns of the dangers of a $1 trillion deficit and says that there will be some tough choices ahead.
• UK Chancellor Darling is quoted in the FT as saying that the economy is far from through the recession and concludes that even the bright eyed government has abandoned the idea of a recovery in the 2nd half of 2009.
• The ever cheery UK press are suggesting a 45% drop in earnings for companies this year with 10% of all shops predicted to be vacant by end 2009.
• The latest employment surveys in the UK confirms the anecdotal evidence job shedding and downward wage pressures. KPMG’s employment survey revealed the sharpest decline in demand for permanent and part-time staff for at least 11 years. Its index of staff placement dropped to 28.6 from 28.9 in November, which is consistent with the jobless total rising above two million (for first time since mid-1997). They will be re-running “Boys from the Blackstuff” on the BBC soon at this rate.
• The German FT reports that even the hands off German government is planning a €100bn bailout fund for corporates and that the EU Commission are becoming increasingly perturbed by divergences between countries in the Eurozone. These strains are illustrated by Ireland. They are being held over a barrel by investors and being forced to pay outrageous spreads over where the German government can borrow despite having the same top triple A (AAA) credit rating.
• A really scary chart that shows the true extent of the U.S. housing bubble in historical terms. It extrapolates (always a dangerous business mind) where we may be heading.

Marks And Spencer’s Trading Update Disappoints
Marks and Spencer confirms wide press reports that its Q3 numbers were poor. Like-for-like sales were down 7.1%, with an 8.9% drop in general merchandise and a 5.2% drop in food sales. It noted that its post Christmas sale started with 15% less stock than last year (remember, the likes of M&S and BHS were warning about what was coming up as long ago as April, so the stock overhang suffered last year should have been anticipated to a certain extent this time round).

The press had been reporting M&S would unveil 1,000 job losses, but in fact the plan is for 1200, with 450 to go in head office, and then an additional plan to close 27 stores with the loss of 780 jobs. Big store closures by a stalwart like M&S is big news.

Equities

• Fyffes’ results came in ahead of the markets forecast.
• Grafton’s trading update revealed little news bar that earnings are likely to be at the lower end of expectations.
• ICON reported a 30% fall in U.S. biotech funding.
• DCC is benefiting from the coldest winter in 12 years via DCC Energy.
• UK discount airline easyJet reported surprising strong December numbers.

Data Today
After a methodology change last month, the US ADP employment data, due at 8:15 a.m. ET, is expected to show another huge job loss count, approaching 1/2 million. Remember that this is an indicator of the biggie, the official Non-Farm payroll number, out on Friday at 8.30 a.m. ET. Economists are forecasting cuts of between 400k and 800k, so someone is going to be very wrong.

And Finally… Another Of This Years Buzzwords Explained: Quantitative Easing

Disclosures: None

Comments

[sr9web:]

Mole, this lastest rise in the market looks to me like a bear market rally driven by short-covering. Those covers were pushed into 2009 to bank some gains this year.

Looks like a pullback is already forming.

Jan 07 07:10 AM

[prudentinve...:]

As a long-term investor, I focus on fundamentals, both current and prospects for their improvement going forwards. Both do not argue for buying at current levels.

Jan 07 08:17 AM

[Tony Petroski:]

Mr. Mole. Just what is the "Obama effect?" DOW high at 9653 on Nov. 3 (reminder: I think it was the 4th of November, that historical day Obama swept to power) and currently the DOW closed at 8769. I agree with you, sooner or later this Obama effect has to wear off.

Jan 07 05:35 PM

[sr9web:]

Uh, told you so....


On Jan 07 07:10 AM sr9web wrote:

> Mole, this lastest rise in the market looks to me like a bear market
> rally driven by short-covering. Those covers were pushed into 2009
> to bank some gains this year.
>
> Looks like a pullback is already forming.

Jan 07 05:53 PM