Preview from Europe: Another Rollercoaster Day on the Markets

The ‘could go up, could go down’ club that is the Dow Jones these days continues its volatile flirtation with the psychological 8,000 level. More disappointing earnings, guidance numbers and layoff news from Microsoft (MSFT), eBay (EBAY), Lockheed (LMT), Advanced Micro (AMD) and the regional banks took their toll. The Dow finished down 130 points yesterday, despite a late in the day rally.

Today’s Market Moving Stories

• In Europe this morning, Merck (MRK) reported good test results for their new MS drug. Shares are up while insurance names are proving the main drag with Axa (AXA) off 5% and Allianz (AZ) down 8.5%.
• The blockbuster news is that pharma giant Pfizer (PFE) are looking to swallow up fellow drug maker Wyeth (WYE) in a $60bn deal the likes of which we haven’t seen for aeons. The industry is now mature and is seen as being dogged by high production costs (R&D) and declining new product development. Both companies face big challenges solo due to patent expirations on some of their most lucrative products and heavy competition from generic drug makers.
• In after hours trading both Google (GOOG) and AMD were lower after disappointing the market. And tech shares led the Nikkei down 3.8% overnight with Sony (SNE) and Samsung (SSNLF.PK) (who posted their first ever loss) the main drag on worries over the huge drop in exports and poor results. While Down Under, Babcock & Brown (FLY) struggled as it said it saw no value for equity holders under its revised business plan and balance sheet restructure. It can’t be long before the administrators are called in methinks.
• More tales of broken China with a profit warning from their biggest auto maker SAIC (SAI) who warned that 2009 sales may be halved. Recalled SAIC own 51% of Korea’s Ssangyong who filed for bankruptcy in early January. And it seems that the new US Treasury Secretary Geithner, who is just out of short pants, wants to start a trade war with China, accusing them of manipulating their currency. Rather odd timing given all those bonds they are going to have to force feed them to pay for Obamalus.
• Yesterdays US housing starts and building permits fell to record lows. So much for a bottom?
• Makes a refreshing change not to have mentioned the banks YET. Anyway Barclays BCS) CEO Varley is quoted in the Independent as saying that the bank will still make a profit in 2008 after taking all necessary write downs (stop me if you’ve heard that one before). Belgium’s Fortis bank has just reported a stunning loss of €14bn for the 1st nine months of 2008 and said it expects to haemorrhage a further €4-5bn in Q1 2009.
• Bank of America (BAC) have dumped John Thain; the man who flogged them Merrill Lynch for a fortune. Stories that he’d spent $1.2m on a refit of his office in a Dennis Kozlowski moment or that 75% of the latest taxpayer TARP money for BoA were to be used to pay Merrill Lynch bonuses were probably the tipping point!

No Bad Bank for Germany?
The German government has ruled out the creation of a state-owned bad bank which bankers have been lobbying in favour of during recent weeks. Instead, both Angela Merkel and Peer Steinbruck appear to favour the idea of private-sector bad banks, similar to what Sweden did during its financial crisis in respect of the banks that were not nationalised. This private bad bank would be an asset management company. (It is not clear to us how this would solve the problem. In Sweden the bad banks owned mostly properties, not toxic paper that is mostly worthless).

Data And Earnings Today
The UK is the first major economy to release its Q4 2008 GDP number today showing the extent of the super slowdown. A contraction of 1.2% was the consensus forecast but it came in at –1.8%. Sterling has fallen to a 23 year low of $1.36 versus the dollar on this news.

From Europe, important PMI data is out from France, Germany and the Eurozone as a whole. The readings were a tad better than expected but still worryingly weak.

Note Korean GDP was down a staggering 21% in Q4 2008 and China is now joining the rest of the world in sinking into the cesspit of an uncontrolled economic slump. The yuan clearly needs to be DEVALUED, Mr. Geithner, NOT re-valued!

Earnings to watch today include those from GE (GE), Xerox (XRX) and Harley-Davidson (HOG).

And Finally… Tad In Your Face But

Disclosures: None

Comments

[James Wilson:]

What people don;t realize is that Barclays is not about to hand over ownership to the Saudi's and would cah out of everything and close the business first.

If they do that all the banks in the U.S. will fail and most banks around the world since they are the largest stock holder in most banks.

Jan 23 05:41 PM

[morph366:]

How long do you think it will take the forensic accountants to figure out just what value to put on Barclay's assets?

Jan 24 06:29 AM

[Conan the B...:]

Geithner put a Bullseye on the USD. Gold answered his call to Depreciate the dollar. The other commodities did not join the fray, they did not appreciate as much.

If the Chinese take it as Political Grandstanding, the status quo will be maintained a bit longer.

But what Gold did in response is just a forerunner of what will eventually occur.

Maybe Geithner thought the USD would drop. Instead it held firm and Gold rose instead.

The economy is to fragile for this sort of misguided rhetoric. IMO

Jan 24 12:47 PM

[carey_jim:]

In capitalist countries, which are convinced that governments are evil, government run banks are called BAD banks and in communist countries, which are convinced that capitalism is evil, free markets are called BLACK.

Silver lining or our economic woes: We could call state run banks, BLACK banks, and communist free markets, BAD markets. This would have a huge effect on the world economy because names are important. If we had mostly black banks we could solve their problems with huge white downs and all bad markets would be improved by chasing out bad money with good.

Don't laugh, Andrew Jackson and Thomas Jefferson proposed the idea two hundred years ago. It might work.

White Mondays and good markets would be guaranteed by the economic law of reversal.

Jan 25 12:53 PM

[JamesL:]

Why did I get a flag on FLY here?
FLY is a Scottish company, isn't it? Babcock and Brown's FLY is not in trouble, it's the OTHER company ... How is FLY related to these problems?,

On Jan 23 05:41 PM James Wilson wrote:

> What people don;t realize is that Barclays is not about to hand over
> ownership to the Saudi's and would cah out of everything and close
> the business first.
>
> If they do that all the banks in the U.S. will fail and most banks
> around the world since they are the largest stock holder in most
> banks.

Jan 27 12:22 PM