Preview from Europe: The Horror Show's Alive and Well

A little banker patter seems to go a long way these days. Yesterday, equities hung in the black thanks mainly to a bravado performance by Jamie Dimon, Chairman and CEO of JPMorgan (JPM) who talked his book in a manner we usually associate with bouffant Bill Gross from Pim(p)co. But the vista of a dire retail sales number today is looming large as the US consumer retrenches further. This points to another downbeat quarter for earnings.

Today’s Market Moving Stories

• In his upcoming budget UK Chancellor Alistair Darling looks likely to put the stress on implementing tax cuts and spending increases that are already in the pipeline. He notes that the fiscal stimulus “has now been widely agreed, but now needs to be implemented.” The FT notes that “some ministers believe Mr. Darling is coming under pressure from Mr. Brown to give the economy another fiscal jolt.”
• German Finance Minister Peer Steinbrueck says that speculation about a possible break-up of the Euro-zone is “completely absurd and very dangerous.” He adds: “I do not think it possible that a country will drop the euro because the costs linked to that would be exorbitant and the country would be extremely prone to speculation… The euro zone is absolutely stable. Speculating that a country is in concrete difficulty with its payments is like playing with fire.”
• Don’t be fooled, the horror show is alive and well. The most-read list on Bloomberg.com gives us three salutary facts about the US. Firstly, only 17 homes were sold in February in Greenwich, CT, compared to 75 in the same month a year ago. Secondly, the number of millionaires is down to 1993 levels. Corporate man Bill Gates (MSFT) has overtaken investor Warren Buffett (BRK.A) as the world’s richest man. Wackiest of all, a 12.1% annualised decline in Japanese GDP (the worst since 1974) was better than expected.
• The Global economy is set to shrink by 1-2% in ’09, with Central and Eastern European countries particularly vulnerable. World Bank’s President Zoellick believes that “trade will fall by the greatest amount in 80 years,” while the IMF’s Strauss-Kahn also weighed in stating that in 2009 the world would be gripped by “the great recession.” Bleak warnings from policymakers.
• Australia jobless rate jumps 0.4% to a four year high of 5.2% in February, well above the forecast of 5.0%. The RBNZ (New Zealand’s central bank) cut its benchmark rate by 50bps to an all time low of 3.0% and signalled the easing cycle was close to an end.
• Taoiseach (Irish prime minister) Brian Cowen confirmed yesterday that an emergency budget will be introduced on April 7th to tackle the huge hole in Ireland’s public finances. The key will be how the big three rating agencies (Moody’s, S&P and Fitch) react and whether they maintain Ireland’s current AAA rating. The markets expect this to be cut, indeed the country’s bonds are being priced at the level of Greek debt (which is a single A credit).
• Freddie Mac (FRE) reported a Q4 loss of just $23.9bn (beating Fannie Mae (FNM)) and is seeking another $30.8bn capital injection from the Treasury’s blank cheque department! And looking ahead to full year 2009, it boldly stated that the hemorrhaging would continue and put us on notice that it expects to need even further taxpayer assistance! It is most worrisome that the Obama administration seems so bereft of ideas on how to deal with the GSE black hole. It refuses a quick wind up. It is leaving a gaping wound, with gangrene the risk.
• Old habits die hard it seems at Merrill Lynch (now owned by Bank of America (BAC)) with news that it allegedly misled Congress on a decision concerning some $3.6 billion in bonuses. Merrill’s lawyers had told Rep. Henry Waxman, in a November 24 letter that decisions on bonuses had not been made even though a decision to speed up bonus payments had been made two weeks beforehand.

More Trouble Ahead For UK Housing
Numis Securities writes that “despite UK house prices already having fallen 21% from the peak, we do not believe that the correction is anywhere near over.” They continue: “Our core headline forecast is that UK property prices remain between 17% and 39% overvalued based on fair valuation. Moreover, history has shown us that when property… which has experienced a price bubble corrects, the price tends to fall below fair value for a period of time, as confidence in that market remains low. Prices could fall a further 40-55% if the over-correction was as bad as the early 1990s in our view.”

Equities

• In pharma land, the simmering takeover deal of Genentech (DNA) by Roche (RHHBY.PK) has been agreed at $95 a share, making it a $46.8bn deal.
• Oil producers are again under pressure this morning on the back of the 7% fall in crude prices yesterday with Total (TOT), Eni (E), Shell (RDS.A) and Repsol (REP) all down.
• Giant French retailer Carrefour is hanging in there price-wise despite a 44.7% drop in profits.
• No such luck for jewellery maker Bulgari (BULIF.PK) or potash producer K&S, both of whom are off after reporting big misses in results.
• Former state airline Aer Lingus released disappointing numbers yesterday, which was not that much of a surprise. What really caught the eye and alarmed the market was the very high level cash burn. They really need to get their cost base sorted a la Ryanair (RYAAY) if the stock is going to recover from the beating it’s taken in order to compete.
• McInerney Group yesterday confirmed that a revised UK loan facility agreement was signed by all parties on 10th March 2009 removing much short term uncertainty. The new credit facility is crucial for the group as its covenant is based on more realistic terms such as sales, cash (the industry norm) and modest reduction in debt. It will enable McInerney to focus on cash flow generation and cost reduction. McInerney will report full year results on March 23rd.

Data Today
The continuing story of evaporating exports will get another chapter today as the standout figure this morning is German Industrial Production. It is set to make awful reading after the disastrous factory orders data yesterday, down 38% on an annual basis.

Come early afternoon, the markets will be focused on February’s US retail sales figures (12.30 GMT due to the daylight savings time change in the clocks Stateside). Analysts want to know whether the rebound in January was a blip in the downward trend (likely) or the start of a miraculous turnaround (very unlikely). Admittedly, the Fed said in its March Beige Book that “many Districts noted some improvement [in retail sales] in January and February compared with a dismal holiday spending season”. The Redbook and ICSC weekly sales figures also both picked up in February, albeit from very low levels. However, I find it hard to believe that retail sales are undergoing a meaningful improvement at a time when employment, equity prices and house prices are all plunging. It is also notable that large retailers, such as Home Depot (HD) and Costco (COST), have recently announced poor earnings.

And Finally… If You Ever Wanted A Reason To Avoid Working In The Sub Prime Sector

Disclosures: None

Comments

[Sentinel:]

Yes the horror show continues. It's the fact that 400 trillion dollars of derivative asset valuation takes a long time to wash out of the system. And government intervention makes it worse and longer.

And it couldn't be a better director than Sam Raimi. Looks like he is finally returning to his horror film roots with "Drag Me To Hell". The old hag even looks a little like one of his zombies from the original "Evil Dead" movie which launched his career and eventually took him to the "Spider Man" franchise. The first "Evil Dead" movie is still one of the most disturbing films ever made. Glad to see him take on the "hell" that is the world of mortgage finance.

Although I would have explored another title for the movie. If you literally translate the word "Mortgage" is means.....

Death Pledge

Mar 12 08:23 AM

[Speedspirit:]

If retail sales slight improvement might have to do with the bargin basement prises, 50% off, then hang on to your hats. Retailers like Home Depot and Lowes must be sitting on some inventory and there is only one way right now to unload it, sale 50% off. Then they will have to close a few stores. Then someone will write another doom and gloom article. Our time would be much better spent focusing in on all the ways out of this mess. We know that things are bad and they will get alittle worse before it can get better.So on the one hand half of the country wants Government bailouts to put things back where they were with easy credit and consumer spending on things we dont really need. And on the other side Doom and gloom. But there is light at the end of the tunnel which simply is the middle way. Patience, common sense, prayer.

Mar 12 08:44 AM

[bricki:]

The fact that the German Finance Minister feels he needs to rebut stories on the break up of the Euro Zone is a warning that it might be more likely than anyone thinks.

Mar 12 09:36 AM

[MGA_1:]

Sad watching the evaporation of money world wide...

Mar 12 09:48 AM

[Fabien Hug:]

The only country that would gain from quitting the EUR is Germany. As long as they stay, EUR stays.

Mar 12 10:04 AM

[monday1929:]

Exactly. The progression: There will be no recession. There may be a mild recession. We are in a recession which will be short and sweet. The recession may be as bad as 1980. There will be no depression. There may be a very mild, fun little Depression. We are in a Deep Depression which will never end. The Depression is over.


On Mar 12 09:36 AM bricki wrote:

> The fact that the German Finance Minister feels he needs to rebut
> stories on the break up of the Euro Zone is a warning that it might
> be more likely than anyone thinks.

Mar 12 11:31 AM

[monday1929:]

No disrespect, but prayer is best left a personal matter. Some do not believe it is a strategy, and some do not believe in Santa or similar beings who respond to our wishes.


On Mar 12 08:44 AM Speedspirit wrote:

> If retail sales slight improvement might have to do with the bargin
> basement prises, 50% off, then hang on to your hats. Retailers like
> Home Depot and Lowes must be sitting on some inventory and there
> is only one way right now to unload it, sale 50% off. Then they will
> have to close a few stores. Then someone will write another doom
> and gloom article. Our time would be much better spent focusing in
> on all the ways out of this mess. We know that things are bad and
> they will get alittle worse before it can get better.So on the one
> hand half of the country wants Government bailouts to put things
> back where they were with easy credit and consumer spending on things
> we dont really need. And on the other side Doom and gloom. But there
> is light at the end of the tunnel which simply is the middle way.
> Patience, common sense, prayer.

Mar 12 11:33 AM

[samwise:]

great article. love your name and picture. still a believer in the Euro--lot's of weirdness right now, especially in the Pound/Euro exchange rat. Euro seems WAY overvalued in that space. Very interesting part on real estate--a better history lesson is the 1970's. some would argue NYC has never recovered from that real estate collapse, which gets to the larger point--if history is any guide, real estate collapses like this can last decades and even be permanent (look at the Mayans, for example.) As an aside and as it relates to the big stuff, namely government response, before attacking tarp as an outrageous waste i'd attack the real estate plan as definitely throwing money down the toilet bowl.

Mar 12 12:14 PM

[grh1212:]

Bravo, Sentinel!


On Mar 12 08:23 AM Sentinel wrote:

> Yes the horror show continues...

Mar 12 03:21 PM

[ngwun:]

"The key will be how the big three rating agencies (Moody’s, S&P and Fitch) react and whether they maintain Ireland’s current AAA rating."

They still have street-cred? Guess the world still likes horror movies, as long as they are voyeurs & not participants.

Mar 12 05:29 PM

[Robert Mcdo...:]

Europe feels pretty good. The continentals have had high unemployment rates for a while. Ireland is staring at a 6% recession this years but got its AAA confirmed. UK is ahead of the curve heading for less than 3% GDP drop maybe, but 8% unemployment, while Government is solid in how it'll be making £ billions out of helping out the banks by filling in their 'funding gaps'. The Germans and the French are coming on-message. The Euro Zone economy may revise its GDP in hindsight up, not down and find its got a lag before the full recession hits them by which time USA and UK will be back in positive growth. Sure, trillions of assets have gone south, but underlying net interest income of banks is holding up well, and assets can always come back even if they take 5-6 years to get back up to same cliff-edges where they fell off last year. Short-sellers are staring at postage stamp bank share values and getting real nervous that the great days of bear market profits are now getting harder to pick. Good time while the US$ is high to book your holidays over here - I recommend Scotland for the Edinburgh Festival in August and the Mediterranean for September.

Mar 12 06:06 PM

[BxCapricorn:]

If you come away with anything, after watching the financial news, it should be that they are reiterating press released lies, and that believing what you see around you, is the greatest due diligence. Do you really believe, looking around, that things are better?

Sure home sales in CA, and NV are up. The sales price has been effectively cut in half. Are your friends and family better off? How is it that they can then buy more STUFF? Even if they do begin to recover, will they throw their money back into stocks, vice pay off bills, and creditors? We have collectively experienced an enormous paradigm shift. Things may not be as horrific as doomsayers claim, but they will never be the same, and the myth of double-digit growth, is dead. Long live the prudent and wise.

Mar 12 08:26 PM

[Dr. O:]

It's usually not the news but the market's reaction to the news that counts. The market is a forward looking discounting mechanism.

Retail sales were better than expected and bank CEOs are talking about "profitability." Up another 3%.

Mar 13 12:08 AM