Preview from Europe: Confused and Confounded

On Tuesday, we were all stock traders, by Wednesday we were all bond traders, and by Thursday we were simply confused traders. Riddle me this: we get news of record U.S. mortgage delinquencies (12%), house prices declining at a record pace in Q1, continuing jobless claims holding climbing to a record 6.8 mn , a disappointing new homes sales number, oil creeping back above $65 barrel (so expect oil stock to be up today) and the Dow closes up 103 points?

Call me an old cynic, but in line with the views expressed by Art Cashin on CNBC, I believe the recent rally is almost entirely based upon speculators, suckers and gamblers betting on low quality names. Call it cash for trash but yesterdays move was just garbage. But maybe I’m just Mr rear view mirror

Today’s Market Moving Stories

• The WSJ reports that some Fed officials believe the back up in yields recently reflects a mending economy and a receding risk of financial catastrophe, suggesting they may not rush to step in the way by expanding Quantitative Easing. The FOMC’s Fisher said foreign demand for USTs ( US Treasury Notes) remains strong, adding that he did not think the US would get downgraded.
• Overnight Japanese April Industrial output rose 5.2%mom compared with a 1.6% gain in March with METI suggesting the May outcome will show an 8.8% gain. April real household spending fell 1.3% yoy while the April unemployment rate rose to 5% from 4.8%. Deflation is persisting as Core CPI fell 0.1% yoy in April.
• UK house prices: up 1.2% mom according to Nationwide, first bounce in house prices since Nazareth won the Cup. Still it is down 11.3% yoy and seasonally, we tend to see more buying in early summer. For the moment however think that low volumes skew size of movement.

Auto Action in Germany
FT Deutschland leads with a news report that Fiat is effectively no longer actively considered to be a candidate for the takeover of Opel, but that the situation remained unclear. There is continued uncertainty about the stance of the US government, and it is not excluded either that Opel might follow GM into bankruptcy. There is huge anger in Berlin over the US, which apparently sent a junior negotiator to the marathon meetings, who was not empowered to make any deals. There is another potential bidder, the Chinese car maker BIAC, which has been asked to provide a detailed concept next week.

The newspaper said in a front page comment that the Germans should not be surprised since the interest of the US government and of GM are not exactly the same of those of Germany’s politicians ahead of a general election. A Chinese bid is also not very likely, as this would cause problems for GM’s future market position in China.

Heavy Metals drop in China
Posco (PKX) has accepted Rio Tinto’s (RTP) iron ore price cut of 33% for fine and 44% for lump after Nippon Steel's (NISTY.PK) earlier settlement. For the past 40 years, annual iron ore price contracts were set by the first settlement between a big mill and a miner. This secured supply and reduced price volatility, but as spot iron ore prices collapsed last year, spot has traded at a large discount to the contract price. Chinese steelmakers, the world’s largest consumer, have threatened to abandon contracts and move to spot pricing unless the miners accept a 40-50% price cut. It is still uncertain if the Chinese will follow the benchmark, hold out for a larger cut or move to the spot market, but Posco’s settlement increases the chance of acceptance by Chinese mills

More Bad News at Anglo?
Anglo Irish Bank (AGIBY.PK) is expected to reveal a substantial interim loss later today. Media reports suggest loan losses for the six months to March may exceed €4bn ‘even worse than previously feared’, driven by loan concentration.
This would largely erode Anglo’s €4.9bn core equity base. A key focus will be how this fits with the NAMA process – i.e. whether losses recognised at this stage on its property development book of over €18bn will limit the ‘haircut’ on transfer to NAMA – and the resultant capital requirement.

Tullow Oil Seeks A Partner
According to media reports, Tullow Oil (TUWLY.PK) held an AGM yesterday and commented that it’s likely to seek a partner to speed up the development of its Ugandan interests when it brings them close to production next year. The group expects to spend up to €750 million developing its resources this year, including the Jubilee and Tweneboa fields in Ghana, which have potential reserves of up to three billion barrels of crude oil. The CEO, Aidan Heavy, said Tullow will sell half of its holding to a partner in order to bring the fields to full production. This partner will fund the pipeline.

Mr Heavey said the company was likely to begin the process of finding a suitable partner for the deal next year, when the wells there are nearing production.

Greencore may be getting out of the water!
There is also Irish media report that Greencore (GNCGY.PK) may sell the UK water business which was the source of controversy in 2008. Its water unit operates under the Campsie Spring brand and is a major supplier of own-label waters to key UK retailers. It bottles about 200m units yearly and has had sales of over €40m. A price tag of £10-£20m is quoted which could be used to further erode group debt which was €332m at the half year. Proceeds could also provide funds for the planned build-out of the group’s US food manufacturing assets

Smurfit Kappa Extends Banking Cover.
The Irish Independent reports this morning that Smurfit Kappa (SMFTF.PK) is in talks with lenders about easing its banking terms to allow “additional headroom” on the groups €3.1bn in debt. The group had previously indicated that they were trading “comfortably” within its covenants, but the measure is said to be considered due to the deteriorating seen in its main markets and to help soothe investor fears about the possibility of breaching those covenants.

The paper also reports that that a number of Smurfit’s rivals are threatening to flood the market for containerboard by increasing capacity at a time of heavy contraction in the industry

Data Ahead Today

• Euro area M3 money supply, Apr (09:00 BST): M3 was likely flat, consistent with a 4% rise from a year ago. Growth in private sector loans should slow further from 3.2 to 2.5% yoy.
• Euro area CPI, May (10:00 BST): Inflation should surprise with a flat result (consensus: 0.2% yoy), the lowest result in the history of the EMU. Currently, inflation is negative in seven euro area countries.
• US GDP (revised), Q1 (13:30 BST): Like the market, I expect a slight upward revision to a still-alarming annualised fall of 5.4%
• US Chicago PMI, May (14:45 BST): Manufacturing should contract at a slower rate as the PMI rises to 42.
• US Michigan consumer confidence (final), May (15:00 BST): Sentiment should continue to improve, rising to 69.
• Earnings from Tiffany’s ($0.20)

And finally…

Disclosures = None

Comments

[dcb:]

I just wrote a long thing that was eaten
1) I have some questions to ask the author and others
2) while the s&P has been range bound and not allowed to fall the 14 day money flow has been decreasing since april 20th. what does this imply for the future.
3) the same people who haven't let the market fall are the same people who drove the market down from jan into march. they are the same people who drove up the price of oil and cause the recession which initiated the tailspin. they are the same people who sold the toxic assets to the world. The market drop is what cause us to have to bailout the banks and give them free tax payer money. Am I the only the who sees that the same people who caused this crisis are the same people who manipulated the market into getting all these bail out funds, etc.
3) while our market has been range bound other markets have been soaring. since the market hasn't been allowed to drop (as the world follows the S&P), our currency has therefore fallen through the floor, and our borrowing costs of the debt have risen
4) this means the same people causing the crisis, and now propping up the markets are killing our currency because it creates a false sense of stability and driving our government borrowing costs up and increasng the deficet.
5) so not only are we bailing these people out, they are costing us money on deficet spending, driving up the price of commodities, reducing the value of the dollar, and for every dollar we spend on them we are loosing at least double that in the value of the dollar and investment flows
6) Therefore, the people we bailed out are causing, and have caused great macroeconomic instability and it continues each and every day because we won't nationalize them
7) I see the above as clearly as day. As clear and a simple truth as I have ever seen anything in my live
8) What the hell is going on? is bernake and our govenrment insane. we are being held hostage by a group of people who are creating massive macroeconomic instabilites and helping them out. We are loosing money at least 2/1 doing so and ruining our future. We are letting and encouraging these people to manipulate the stock market and they are ruining us.
9) Jefferson predicted it over 200 years ago,i t would end when the bankers have everything and the people nothing., I pronounce the united states of america dead. Our government follows a policy of disaster, dictated by people who are allowed to control markets, who then use these markets to get what they want. This is insanity
10) the next question is a standard investment question. Monay has flowed out of the markets (money flow) but it hasn't been allowed to drop, therefore a good entry position has not actually been established since april 20th. If the people are allowed to hold the market up, to enter means they can just decide to drive it down after you enter and there is no real honest market setting level. Any thoughts from anyone on how to handle this invest meant situation. It means effectively that our propped up markets have allowed other markets to rise too far and fast without fear. and once our money has been thrown into the pot there is no reason for this fir not to drive the markets down
How does one invest in this situation? Please advise

May 29 09:19 AM

[dcb:]

I made a long post before, but in summary
1) DESPITE MONEY FLOWING OUT FOR OVER 30 DAYS THE MARKET HASN'T BEEN ALLOWED TO FALL BELOW 88O ON S&P
2) we all now this is manipulation, but if it can be held up it can also be dropped at random by the same people. this false stability has distorted investment flows worldwide. How does one invest in this environment.
3) these manipulations which are tolerated create massive global instabilites. Oil was never worth 147/barrell, the false stable market has increased government borrowing cost (10 year yeild spread), killed the dollar, think about it emerging markets have doubled in three months. What?
4)if they are allowed to prop up, they can bring down just again as quickly. the government knows this and aint doing a thing. how do you invest in this.

May 29 09:30 AM

[Tony Petroski:]

Mr. Mole. The answer to your question, "How can the market be up when the news is down?" is simple. It's a futures market. What we hear is yesterday's news.

I realize you know this.

Not only is yesterday's news yesterday's news, but from a non-diverse media, it's also almost always, bad news. People adjust.

May 29 10:52 AM

[thiazole:]

Exactly - 1st quarter data was terrible (even if we are just seeing some of that data today) and the 1st quarter stock market matched that data. If more people would learn how to use leading indicators instead of looking at data from months ago, they'd see that the hard 2nd quarter data (like GDP) will show an improvement, which is why the stock market is doing better now.

Another thing to consider - people seem to expect the stock market to tank every time the news isn't peachy, but the S&P is already down well over 40% from the high. Much of the bad news is obviously already priced into the market.


On May 29 10:52 AM Tony Petroski wrote:

> Mr. Mole. The answer to your question, "How can the market be up
> when the news is down?" is simple. It's a futures market. What we
> hear is yesterday's news.
>
> I realize you know this.
>
> Not only is yesterday's news yesterday's news, but from a non-diverse
> media, it's also almost always, bad news. People adjust.

May 29 04:33 PM

[Old Trader:]

But most of the data seems to reflect a slow down in the rate of decline, rather than an actual "improvement". Granted, the rate of decline has to slow before it can actually urn around and become positive, but I'm again reminded of the old joke about the guy who jumps/falls from the top of a 50 story building, and as he passes the 15th floor, thinks "So far, so good".


On May 29 04:33 PM thiazole wrote:

> Exactly - 1st quarter data was terrible (even if we are just seeing
> some of that data today) and the 1st quarter stock market matched
> that data. If more people would learn how to use leading indicators
> instead of looking at data from months ago, they'd see that the hard
> 2nd quarter data (like GDP) will show an improvement, which is why
> the stock market is doing better now.
>
> Another thing to consider - people seem to expect the stock market
> to tank every time the news isn't peachy, but the S&P is already
> down well over 40% from the high. Much of the bad news is obviously
> already priced into the market.

May 30 10:46 AM

[thiazole:]

Well, there is obviously some speculation in the market and there was in the 1st quarter as well. The March bottom was priced for an assumed linear deterioration in the economy from what we saw in Q4 2008 and Q1 2009. It isn't going to happen, so it was priced back out. I think the market is now stuck in a holding pattern because it needs proof that we will really go from a "slow down" in deterioration to actual growth. If that proof is coming, we should start seeing it in June-July (in positive retail sales growth, industrial production, durable goods, etc).

May 30 11:22 AM

[Bjarne Jensen:]

dcd:
You asked, "How does one invest in this situation? Please advise" and answered yourself in the previous sentence: "once our money has been thrown into the pot there is no reason for this fir not to drive the markets down". I agree with you. The question then becomes when does the market revert to reflect fundamental value and go down?

It will rise until the stimulus, which is still in the pipeline, is used up. How long is that; I don't know. Likely several quarters, however I'm out of the market until then because, as you pointed out, the market is manipulated.

Who is manipulating it? I'm guessing it is the big banks who are using 'free' tarp funds to make highly speculative market investments in order to rebuild their balance sheets. That's just a guess, Can anybody add anything substanative to that?

May 30 12:45 PM

[LKofScotland:]

There is no point in making any comments whatsover as to why the market is up or down pretty much ever. Whatever it is is what it is and I think the "real money" crowd simply takes it at that and moves on. INTEREST RATES on the other hand do matter. As your video commentary stated there is "douchebaggery" afoot. Prudent SAVERS beware. As John Lounsberry has commented you can get negative returns by keeping your money in a bank. When money market funds began "breaking the buck" the yield on cash should have risen commensurately since cash suddenly became a scarce "commodity." And of course PREDICTABLY all those "screw the working man and my ex-wife" so called titans of finance went crying to their mama in the form of bailouts from all those working men and their ex-wives who have no choice BUT to pay their taxes by demanding trillions from Uncle Sam "or else." Amazingly they have received it thus telling the taxpayer what the government really thinks of their money. (Just greasing the wheels of the Democracy's corruption machine.) Having said that this party is just gettin' started. Savers (and you know who you are) need to be "en guarde" here. If you are surprised that bankers have no problem throwing you under the bus in a world where they have no money themselves then certainly you cannot be surprised that government is trying to stomp out your very existence and soon will start calling you names to boot (the word Jew comes to mind.) In other words we're starting out with the financial gas chambers before our wonderful current regime decides upon instituting the real thing. (Don't think it wouldn't like to the latter either. My personal view is that it would love it as all governments and their functionaries in their modern forumulation are pretunaturally disposed to do exactly that.) Money markets still look good in here but I would avoid banks like the plague of financial locusts that they have become. Still not has bad as insurance companies but boy would they love to be that way.

May 30 09:34 PM