The Dow down sub 8,000 again after dodgy earnings from Kraft (KFT), Sara-Lee (SLE) and Costco (COST) (are people really that cash strapped that they are cutting back on basics?) and expectations of uber weak January retail and chain store sales numbers. Tech bellwether Cisco (CSCO) warned on revenues overnight.
Markets are greedy beasts, the avarice for fresh news is insatiable and they abhor a vacuum. So the distinct lack of any new tangible information on the US macroeconomic policy front is now becoming an issue. Earlier hopes for a swift delivery of solutions from the Obama administration have dimmed further pressuring stocks which continue to face the headwinds of dire earnings, no guidance and woeful economic data.
Today’s Market Moving Stories
- Lots of chat on the wires overnight from various US policymakers. US Senator Dodd (Chair of the Banking Committee) stated that the creation of a systematic risk regulator, possibly the Fed, would be considered to strengthen and centralise financial oversight. Fairly priceless coming from a man who spent his career being sponsored by Fannie Mae (FNM) and Freddie Mac (FRE) to prevent just such a thing happening! Influential Senator Shelby meanwhile said in a candid moment that that the TARP had drifted rudderless and wasted millions (I’d say billions) of taxpayers' money. US Treasury Secretary Tim Geithner has promised to give a comprehensive outline of the NEW program for financial recovery later this week.
- Warren Buffett’s Berkshire Hathaway (BRK.A) has invested CHF 3bn in Swiss Re (OTC:SWCEY) after their horror show results this morning and may be prepared to put in CHF 2bn more to strengthen the company’s capital base. Now, while the Sage extracted his customary pound of flesh, a 12% coupon and the right to exchange into equity in 3 years at CHF 25, Buffett has a pretty poor record when it comes to investing in financials. Think Goldman Sachs (GS), etc.! And what of Bank of America (BAC)?! Down 40% on the week to below the key 5 bucks mark for the first time since 1990. They look increasingly like they're going the way of Citibank (C). Yes, nationalisation of America’s biggest bank beckons which would wipe out the common stock holder. A report in the WSJ implies strongly that BoA wanted to exit the Merrill Lynch deal last December but had their arm unceremoniously twisted by Bernanke and Paulson.
- Other European financials reporting this morning made for all too familiar grim reading. Deutsche Bank’s (DB) results were awful and they look VERY capital light i.e. their leverage ratio is still 28: 1, so either they have to continue to de-leverage or raise extra equity / capital. Spain’s Santander (STD) and Denmark’s Danske (who own NIB in Ireland which was a big drag) also spectacularly missed targets, the latter by a country mile. Prudential (PRU) came in with numbers that can only be described as diabolical and not even on the same page as analysts' expectations, and Swedish bank SEB is planning a rights issue (good luck).
- Tullow Oil (TUWLY.PK), in a drilling update, said that an upgrade for their Kingfisher field is a possibility. With the US foods sector under pressure, Irish stocks Kerry (OTCPK:KRYAY), Greencore (OTCPK:GNCGY) and Glanbia (OTC:GLAPF) all of whom have significant investments in this market may feel a chill.
- On a lighter note, some career opportunities.
The Irish Banks Saga
The Irish Times reports that the Irish Cabinet has already signed off on legislation allowing the National Pension Reserve Fund to be used to help recapitalise the country’s banks. The recapitalisation will most likely be in the form of preference shares being injected into the banks, which will bear annual interest of 8%. Separately, the directors and top executives in Allied Irish Bank (AIB) and Bank of Ireland are facing large cuts in pay as a condition of the bank recapitalisation. The Irish PM, the Taoiseach, told the Dáil yesterday that he expected the upper limit on pay for the highest earners at both banks to be cut by at least 25%.
Davy Stockbrokers have cut their estimates for three of the four Irish banks (BoI, AIB and Anglo). They now only expect Irish Life & Permanent to make a profit in 2009/10.
Once again there’s a huge amount of discussion surrounding the Baltic Dry Freight index. This rose by 15% yesterday to 1316 points, having rallied the best part of 50% so far this year. It’s worth putting that in context though - it was down 94% from peak (July last year) to trough (December). It’s now down ‘only’ 90%.
There are some positives worth considering. The bottoming out of the index is important. It’s a hard push to say that the index is recovering but at least it isn’t falling any more. The other big issue is one of constituents; capesize prices, have rallied more sharply than any other Baltic constituent, up almost 8 times from the low to around $15k per day. This could be an indication that demand is starting to increase again from China after the rundown because of the Olympics. One must beware of the inventory rebuild story though - that caused numerous false dawns in Japan through the 1990’s and indeed in the US post the 2001/03 downturn.
Data And Earnings Today
We have two interest rate decisions from Europe today. Markets expect the Bank of England to cut rates by another 50 basis points at noon GMT, to a new record low of 1%. In contrast, at 12.45 GMT, the dangerously inflexible ECB is universally expected to cowardly hold fire and hide in their blinkered bunker until next month in the face of imminent deflation.
This would be the first month since last summer that the two central banks have chosen a different policy path in direction. That said, I think that it is only a matter of time before policymakers on both sides of the Channel end up lending money essentially for free as events as always will yet again trip up the incompetent ECB who still just don’t get it. Watch out for some interest questions at the ECB’s press conference on the rumbling idea of Quantitative Easing at 13.30 GMT.
And Finally… Another Masterpiece Rant