Preview from Europe: When Green Shoots Are Actually Dandelions

Stocks haven’t seen one of those Boomtown Rats Monday routs for quite a while, breaching the key 50 day and 200 day moving averages around the 900 level on the S&P 500 yesterday. Risky assets of every persuasion sold off on Monday and the more cyclical the asset, the weaker the performance. US equities saw notable weakness across energy, financials and basic materials. Commodities were part of the lead here, with energy hardest hit.

Overly simplistic newswire explanations for the sell-off centred on the World Bank scaling back global growth forecasts, but even if the direction of the revisions were counter-consensus, it is very unusual that they would have much impact. For one thing, their latest forecast is pretty much at consensus, notably for the US, with their 2010 projection of 2% exactly the same as the blue chip median and 0.2% stronger than the most recent IMF forecasts!

Instead, the fact that the market was so ripe for such a sharp move reflects prepositioning heading into the 2 day U.S. FOMC meeting as investors took money off the table looking for lower entry points. The expectations that: (a) the Fed will reaffirm a desire to keep rates stable for quite some time (inclusive of dovish views on inflation); and (b) that this will likely be balanced by some gentle retreat from the pace of QE, are consistent with the reaction in the front-end of the curve.

Note the Russian Micex was down 7.8% yesterday and is now off over 20% since its early June highs and has technically re-entered a bear market. I have warned of late that the BRICS / emerging markets rally looked well overcooked, something the extreme positioning in the recent Merrill Lynch fund managers survey pointed to, i.e. everyone was in the trade.

Today’s Market Moving Stories

• Overnight Asian stocks have tumbled, after falling commodity prices and a sharp drop on Wall Street spooked investors into taking profits and buying the yen on speculation the rapid pace of recovery may not be sustainable. Questions about the extent of Chinese restocking of various commodities weighed on base metals prices and oil overnight, with U.S. crude dropping below $67 a barrel, down $6 from an eight-month high reached on June 11. The U.S. recession was widely viewed as ending sometime in the second half of 2009, but that has already been priced in, leading investors to trim positions into the end of the first half and wait for further confirmation.
• Sticking with Asia, Su Ning, a vice-governor of the People’s Bank of China, says that he hopes China will be the first major economy to emerge from the global crisis. He adds: “The overall situation is stabilising and moving in the right direction.” Government statistician Guo Tongxin writes (on the front page of the China Information News, a paper published by the National Bureau of Statistics) that Q2 GDP will probably rise to close to 8% from 6.1% in Q1. He adds: “Generally, whether it’s in terms of GDP, industrial production growth or steel output, power production and other hard data, unless there are major surprises we can basically adjudge that at present the national economy has touched bottom and the most difficult period is already past.”
• The Obama administration expects the US jobless rate will rise above 10% within the next couple of months, reported White House spokesman Gibbs. Note that in May it was 9.4%, and at the start of the year the White House had been predicting a peak of 8% before dropping back late 2009. The Mortgage Bankers Association has cut its US mortgage origination forecast for 2009 by a whopping 25%. It said it now expects lenders will make $2.03tn of home loans this year, down $700bn on its March forecast. Of that cut, only $84 bn relates to reduced brand new mortgages, the rest is all in lower mortgage refinancing and extremely low volume put through the Fannie and Freddie affordability programs. Note that the MBA actually got a bit excited by the Fed’s various facilities and bumped up its forecast in March by $800bn, so this latest revision is actually a return to ‘as you were’.
• It’s taken a lot, lot longer than anticipated, but finally today the US Energy Department is expected to announce the first draws from its auto sector retooling program. Ford (F), Nissan (NSANY) and Tesla are to be named as the first firms to make use of the $25 bln facility which enables the manufacturers to retool their production lines for cleaner and more advanced cars. This was actually a program first put in place in 2007, though it didn’t get its funding until late last year and wasn’t finally signed off until only very recently.
• Troubled German bank Hypo Real Estate released a brief gloomy statement saying that conditions are getting worse in UK, Southern Europe and US real estate and need more bad debt provisions. They mention also for the first time German real estate in the same sentence as the aforementioned “critical” regions. Does not look good for Commerzbank (CRZBY.PK), Landesbanken or indeed any German bank..
• Ivy League Princeton’s Prof. Blinder sees a 50/50 chance for US core inflation to fall below zero and Nobel prize winner Phelps said it may take 15 years for US wealth to rebound.

Equities
Sunrise European equity news features miner Anglo American (AAUK) whose board firmly rebuffed the daring merger approach from Xstrata (XSRAF.PK) yesterday. They may now try and bypass the board and take the offer directly to Anglo’s shareholders. But Brazil’s Vale SA (VALE) is now emerging as the “preferred buyer” for Anglo’s assets according to Bloomberg news. Arch rival BHP Billiton (BHP) may also feel the heat with commodities under downward pressure for the 3rd day running. More broadly, banking stocks are softer today while drugmakers are firmer (defensive plays). Peugeot has announced that it will make an operating loss of up to Eur 2bn this year and also is to launch a Eur 500m bond issue. Their shares are off about 2% today.

Irish Property Prices Hammered
Irish commercial property values have fallen by as much as 60% from their peaks according to global real estate group CB Richard Ellis. The group also highlighted the fact that Ireland has seen the second largest decline in retail sales in Europe behind Spain. The firm expects this trend to continue into H2.

Separately, a new survey from the Independent Mortgage Advisors Federation claims that the mortgage market weakened in Q2, but the pace of the decline has slowed. The survey sees house prices down 35% from their peak, far more than the 20% contraction seen by the Permanent TSB/ESRI housing survey. On a positive note, President of the IMAF Gerry Kinahan sees the slowing down of the rate of decline as the beginning of a bottoming process and that “some brokers are reporting a tentative improvement”. A bottoming in Irish property prices in conjunction with the consensus view that there is already a bottom forming in the UK housing market has a positive read through for the Irish house builders.

In related news the boys least likely, Irish Nationwide have taken a case in the Commercial Court against developer Liam Carroll (Zoe Developments), who is one of the largest developers in the state. It is making a €60m personal claim against him, which was apparently a personal guarantee given by him in exchange for borrowings granted. This case represents the largest claim that has yet been made against a major Irish developer. To date, the big guns have been kept alive by the banks fearing that a liquidation would create a fire sale of assets and cause collateral damage across the rest of their portfolios.

Property Elsewhere Also Hammered…
The WSJ reports that a deal to sell Worldwide Plaza, a 47-floor building in Manhattan, has fallen through. Although there aren’t any details on the price, the Journal noted that Deutsche Bank (DB) along with developer George Comfort and investment firm RCG Longview had put the building back on the market.

Meanwhile, Fitch warned of the problems in the UK’s Commercial Mortgage Backed Securities (CMBS) sector. It said a lack of commercial property revaluations in recent months meant it wasn’t apparent that many CMBS are actually breaching their covenants. It said on a headline basis, breaches are around 15%, but that understates the true extent of the problem because there hasn’t been a wide round of revaluations and hence it isn’t clear what LTV’s actually look like anymore.

Fitch warned yesterday that one in ten UK residential mortgage borrowers have negative equity in their homes. It looked at 2.7 million mortgage borrowers and found in Northampton 17% of borrowers or 25% of loans by value were under water. The lenders most exposed were Northern Rock, Bradford and Bingley and Alliance and Leicester.

And Finally…
Not a good sign if you are bullish on stocks. One always wonders what they know?

Don’t try this at home kids…

…or, forget IKEA; get yourself down to Martin’s!

Disclosure: None

Comments

[optionsgirl:]

Excellent article that really tells it like it is-warts and all. It's a relief to read the real story, rather than that world bank blather.

Jun 23 06:59 AM

[yellowhoard:]

That's the kind of "frying pan in the face" reporting I like to see.

Keep it coming Moleman.

Jun 23 08:31 AM

[Ray Winter:]

The Mole has diligently collected some very important data underlying the market but not all Banks are disaster areas. For example, Barclays Bank have managed their mortgages business extremely well with only 2% of loans under water, compared to 32% for Northern Rock.

Additionally, the Bank has been very busy strengthening its liquidity position with recent sales of major divisions they may be forced to offload if the Glass-Steagell Act is re-introduced. Do they know something!!!

Their purchase of Lehman's assets is likely to be recognised as one of the deals of a lifetime as it seems to be powering Barclays into the megabank league according to their last quarters results and their share price is still less than a third of what is pre-bubble-burst.

Barclays stock looks a real snip at the current price.

Jun 23 09:41 AM

[Gravity404:]

US stimulus:

Nancy Pelosi uses a Boeing 757 at a cost of $500,000 per month IN FUEL ALONE.

My question is: Where does she have to go?

Jun 23 02:53 PM

[yellowhoard:]

It takes an impressive plane to accomodate Speaker Pelosi's ego.

Jun 23 03:42 PM

[Whippet:]

To Anthropogenic Global Warming Alarmist rallies, of course.

And what is it with these Princeton economists and inflation/deflation? As if the "core rate" means jack $hit when, last time I checked, oil and food are two rather important staples in the American economy. More Jedi Mind Tricks.


On Jun 23 02:53 PM Gravity404 wrote:

> US stimulus:
>
> Nancy Pelosi uses a Boeing 757 at a cost of $500,000 per month IN
> FUEL ALONE.
>
> My question is: Where does she have to go?

Jun 23 04:00 PM

[Fighting Yoda:]

The green shoot euphoria will fade, equity price correction will happen, like all bubbles this mini bubble will meet its rightful fate.

Jun 23 09:14 PM

[one eye:]

Fighting Yoda: I can assume then that Anything which goes up is a Bubble.

How About the opposite side? When the Dow drops almost 50% in 6 months, Was That a Bear Bubble?

When Gold Moved from $700 to $1,000, was that A Bubble? It did so in about 4 months.

You can call it a Contratrend Rally or the Start of a New Bull, But a "Bubble", it most certainly is not.

Jun 24 03:18 AM

[optionsgirl:]

I just read an article that stated that insiders are selling their positions in their own companies at a 9 to 1 ratio. At the start of the rally, they were buying, along with the public, at 1 to 1. If that is true, you've got to figure the next few quarters will be weak and that the S & P is going lower.

Jun 24 07:36 AM