King for a day, Citigroup (NYSE:C) CEO Vikram Pandit, a man who had presided over shareholder destruction equal to the GDP of small nations, had some soothing words for his long suffering shareholders yesterday, “In addition to our strong capital position, I am most encouraged with the strength of our business so far in 2009. In fact, we are profitable through the first two months of 2009.” Citigroup finished up 36% yesterday. As Warren Buffett pointed out, if the government gives you free money courtesy of the hapless taxpayer, you will have a competitive advantage over your competitor and your non legacy business will be hugely profitable. The trouble is, of course, the pesky sins of the past and the huge leverage that will continue to force write down on existing “assets” until deleveraging is completed. Adding to the good news for stocks was the proposal to bring back the old fashioned “uptick” rule and the unicorn like dividend hike by Microsoft (NASDAQ:MSFT) to 3.4% which led the overall NASDAQ to a 7% gain. But selling rallies will remain the clarion call of many investors as yesterday will be dismissed as short covering. One wonders whether CNBC will call another bottom!
Today’s Market Moving Stories
- In overnight news Japanese machinery orders dropped 3.2% in January, marking the fourth consecutive monthly decline (the seventh in eight months). This confirms a miserable outlook, mostly driven by collapsing exports and corporate profits.
- Chinese trade stats for February showed exports declined a huge -25.7% YoY versus -17.5% YoY the previous month. The timing of the Lunar New Year meant that the numbers should have been worse in January, but better in February, so today’s figure implies a significant deterioration in the outlook. Imports are also falling at an accelerated rate to imply that export growth will remain weak in the coming months. This data merely underlines the slump in the global economy.
- In early trading European equities are soft and seemingly not buying into the rally Stateside. They are not being helped by another jaw dropping loss from a bank. This time it’s the turn of UBS (NYSE:UBS) who have just reported a wider than expected loss of $18bn for 2008. HSBC (HBC) are also back down ahead of their jumbo rights issue and oil stocks (Cairn (OTCPK:CRNCY), Premier (OTCPK:PMOIY) and Repsol (REP) in particular) are under pressure. In the advertising space JCDecaux (OTCPK:JCDXF) is down 16% after scrapping their dividend and issuing frilly horrible guidance. One on the up are tyre maker Pirelli (10%) who have been rated a buy at Deutsche Bank.
- Quantitative easing (QE) day has arrived in the UK. After months of debating its effectiveness, the Bank of England will begin its QE mission through this morning’s first reverse gilt auctions. The bonds targeted range from 2014 to 2018 in a total size of £2bn. The level of market participation in the first few reverse auctions will be crucial in determining how aggressive the BoE will be over the 3-month period, especially as it is likely to be targeting at least £50bn in total gilts during this time.
- Note Bernanke killed hopes of a suspension of mark to market accounting yesterday.
- On the Irish Economy blog Philip Lane argues that falling CPI inflation provides an opportunity for the Irish government to raise VAT taxes, substantial revenues that would come in handy in the current fiscal situation. It is the mirror image of a situation several years ago when high inflation rates prompted calls for a cut in VAT.
- In Irish equity related news, Irish banks enjoyed a respite yesterday. As well as being lifted by the general improved sentiment they were buoyed by comments from governor of the central bank Hurley who said that the government is considering adapting the €440bn state guarantee to facilitate longer term bond issuance by the banks well beyond the initial two year timeframe. Aer Lingus is off 11% odd this AM after recording a €107.8m annual loss and saying that it is unlikely to record a profit this year. And Ryanair (NASDAQ:RYAAY) have announced that they are to become the first airline to move 100% to web based check in as of Oct 1st this year in another innovative first mover effort to reduce costs.
- With Cairn announcing a highly surprising share issue representing 5% of the outstanding, Davy’s are recommending Dragon Oil (OTCPK:DRAGF) as a less risky play while Tullow Oil (TUWLY.PK) remain very focused and more financially sound.
A Suckers Rally?
So US equities enjoyed a rally yesterday, racking up gains of around 5% by late London afternoon. Now that the S&P 500 is trading on a 10-year cyclically-adjusted P/E ratio of a little over 12, there is no major valuation constraint standing in the way of a stock market rally. At 10.8, the average cyclically-adjusted P/E ratio at the nadir of each of the past 15 bear US recessions has not been much lower. Stocks typically turn the corner six months before the trough in economic activity.
But earnings have typically only reached a floor three months after a recession has ended. My reticence to turn more optimistic on equities is that I just can’t see earnings turning up any time soon. On the contrary, I think profits will remain under pressure well into next year, keeping any lasting rally at bay for now.
What Is The Uptick Rule
Congressman Barney Frank has had enough of the SEC and its no-regulatin’ past, and he has vowed that the uptick rule will be reinstated within a month. The uptick rule is a handy bit of regulation that governs short selling. Its intent is to prevent short sellers from continually driving the price of stock down with their wacky selling. The uptick rule mandates that the initial sale is at a price higher than the last trading price, which both slows down short selling and helps to prevent massive volumes of short sales from causing a stock's price to plummet very rapidly. This is more the case with hedge funds, as individual investors rarely short at a sufficient volume to drastically affect a stock’s price. The rule was binned in July of 2007 after the last SEC decided it was outdated. Then rather than reinstate it last autumn they banned short selling which spawned the monster of the massive growth in the completely unregulated CDS (credit default swaps) market. A far more deadly hybrid beast. On the downside traders say it will take six months to get the old technology tweaked to handle such a change.