Preview from Europe: Four Day Winning Streak Snapped

by: The Mole

A reality check for the Dow yesterday; the onslaught of ever grimmer economic news (and serious downward revisions to previous numbers) finally took its toll and snapped the 4 day winning streak. There was notable weakness in Banking (the recent star performer), Autos (Ford’s (NYSE:F) $6bn loss), Aerospace (on dire durable goods data) & Industrial equities.

Today's Market Moving News

  • Tokyo tumbles. The Nikkei was down some 3.3% overnight as official data showed a disastrous 9.6% collapse in December industrial output - a record. Shares in Nikon (OTC:NINOF), Canon (NYSE:CAJ) & Toyota (NYSE:TM) (who said that their yearly loss may be three times higher than the level they previously warned of) led the rout. Also noteworthy was Honda’s (NYSE:HMC) 90% drop in profits, Hitachi’s (HIT) plan to cull 7,000 jobs (they also slashed guidance) and NEC to lose 20,000 jobs. In a separate development, fears of the return of the dreaded deflation were stoked by a report that Tokyo’s core prices declined by 0.3%.
  • U.K. consumer confidence ebbs again to near record lows in January of –37 as the economic lights went out and the public remained seriously browned off.
  • US bank bailout numbers just keep getting bigger. Any advance on $4 trillion anyone?
  • Meanwhile back in our safe European home Benelux basket case bank Dexia has estimated a net loss of Eur 3bn (cough, seems way way too low to me), beyond basket case Germany’s Hypo Real Estate look set to dispose of other ill fated Dublin subsidiary Depfa bank (now if ever there was a match made in hell).

ECB Interest Rates
After 3 months of sanity from the ECB in terms of rate cuts, normal service has resumed at the home for the bewildered muppet monetarists with J.C Trichet again ruling out a rate cut at February’s governing council rendezvous. So, why are they even bothering to meet?

Yet again events will prove their inaction as a betrayal of their responsibilities. Recall, these are the geniuses who increased rates in July 2008 in the face of the worst economic crisis since the 1930’s in order to play the schoolmaster to German Trade union IG Mettal during wage talks. They’d be able to see the wood if it weren’t for those darned trees.

Dollar Strength
The US dollar is back in vogue & notably stronger overnight on good foreign sponsorship of the otherwise soggy government bond auction Stateside and the return of risk aversion which also saw the yen back in demand

Equities News in Brief
Cemex (NYSE:CX) reported disappointing results (down 27% YOY) as global cement demand collapsed. Bad news for CRH (NYSE:CRH).

  • SCA, the second-largest player in the corrugated packaging market in Europe (after Smurfit Kappa Group), released Q4 and full-year results indicating a sharp deterioration in its packaging profits in the quarter.
  • In a press interview, Danone’s CEO (OTC:GDNNY) confirmed that the group's ‘multiyear’ targets are still on the table but that the target was being put aside for 2009.
  • In another example of the vigour with which Elan (NYSE:ELN) is protecting its patent estate, the company filed suit on January 22nd against Alcon (NYSE:ACL), accusing it of infringing two nanosystems patents in its glaucoma product, Azopt.
  • From the International Air Transport Association: Cargo Plummets 22.6% in December

Banking on a Bad Bank
There’s a good beginner’s guide to bad banks here.

The US government is looking at a two-part bad bank structure in which it will lift a chunk of distressed assets off the US banks and will also provide a set of guarantees to halt losses on those assets that remain on balance sheets, reported the WSJ. It said aside from the fact that it’s a compromise between two deals that have been put forward, it also cuts back on some of the outright costs to taxpayers. That’s a crucial consideration for the new administration which is already struggling to win over Republicans on the stimulus plans.

The Journal said the plan on the table would see the FDIC purchase already heavily marked down assets from the banks and then hold them to maturity. That means the banks don’t then have to take associated writedowns on material that remains on their books. Meanwhile, the remaining assets are then covered by a loss guarantee (for the techincal amongst us, that is in effect a form of gap-insurance on marked value against maturity value). However, note that CNBC reported that US officials and bank executives haven’t been able to agree on terms for the deals and so at the moment there isn’t a solution available.

The Wall Street Journal carries a series of columns looking at crisis solving techniques. They are all worth a read, but what comes out by the end is that none of these measures on their own are going to work. There are suggestions that loan modifications are the answer, or bad banks, or a complete overhaul of personal and government borrowing. There are also suggestions that the US should think again about its foreign policies and use its resources to support its own economy rather than buying votes abroad. All politically charged stuff but all suggestive that the ’solution’ will be a combination of measures and require a huge amount of time.

Financial spread betting blogClick to enlarge

By the way, everyone’s favourite poster gal analyst, Meredith Whitney had another swipe at the whole idea of a “bad bank” on CNBC last night.

Equities Today
Earnings today from Chevron (NYSE:CVX) ($1.81 estimated) , ExxonMobil (NYSE:XOM) ($1.45 estimated) , P&G (NYSE:PG) ($1.58 estimated) and Honeywell (NYSE:HON) ($0.97 estimated).

Data Today
The big one at 13.30 GMT is US GDP which may print a horrible contraction of over 6% for Q4 2008 (the worst read in 27 years). The open question remains: does this mark the trough or will Q1 2009 be even worse?

And Finally …
MC Bailout is in the house