Preview from Europe: Bulls and Bears Call It a Draw

Bulls and Bears called it a draw Thursday as all three major indices ended flat. Energy stocks were boosted by news of a large gas discovery by Exxon (XOM) in Canada and the economic glass half full argument was given a boost by the dramatic fall in weekly jobless claims (-52k). However, continuing claims surged to another sorry record (of 6.883m). The discounted sage Warren Buffett meanwhile offered the opinion that unemployment may reach 11% and said that a second stimulus package may be needed (he didn’t of course say who’d pay for it).

There was notable weakness in pharma & retail stocks (after disappointing same store sales numbers). The stock market is at an interesting crossroads. The S&P futures closed right on their 200 day moving average. Weekly momentum remains quite bearish for stocks.

Today’s Market Moving Stories

• The U.S. Federal Reserve went on the public offensive Thursday and launched a robust defence of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the economy. Fed Vice Chairman Donald Kohn said opening up some of the U.S. central bank’s most sensitive decisions to political scrutiny could result in higher long-term interest rates and hurt the United States’ credit rating. Testifying before a congressional panel, Kohn sought to beat back a proposed bill that would open the U.S. central bank’s policy decisions to audits by a federal watchdog agency. More than half of the members of the U.S. House of Representatives have signed as co-sponsors of the measure. “Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation,” Kohn told a House subcommittee. Kohn’s testimony comes as Congress debates President Barack Obama’s plan for regulatory reform, which envisions the Fed taking on an expanded role monitoring risks across the entire financial system to help ward off future financial crises. The proposal has boosted calls for greater accountability at the central bank, which already faces heavy scrutiny from lawmakers troubled by its role in bailing out Wall Street. Kohn said the administration’s plan would not greatly expand the Fed’s power, and said it would work hand-in-glove with monetary policy, not compromise it as some critics contend.
• Japan: Economy Minister Yoshimasa Hayashi says: “If the Yen’s appreciation and stock declines last a long time, there are concerns that they may have a negative impact on both exporter and overall sentiment. For this reason, we need to keep monitoring moves in the stock and currency markets closely.” The Bank of Japan’s Wholesale prices index the CGPI (which tracks prices of domestically produced and used goods traded among companies) dropped 6.6% y/y in June. This was the largest drop since comparable data became available in 1960.
• In the shipping news the Nihon Keizai Shimbun reports that rates on container ships from Asia to North America have been dropped for the first time in three years (taking them to six-year lows). The paper says that shippers have agreed to reduce rates by 20%-40% for the fiscal year ending May 2010. I can’t help getting that summer of 2008 feeling when I read reports like this.
• And continuing the theme, recent history about to repeat itself, Germany’s Handelsblatt newspaper reports that at least 10 Eastern European countries are in talks with the International Monetary Fund about emergency loans for their economies. The paper cites sources close to the IMF as saying that a majority of the fund’s most senior officers are supporting the loans. The paper names Bulgaria, Croatia and Macedonia as being among those who had asked the IMF for help. It adds that Hungary’s government has not yet decided whether it needs additional funds. The unidentified source says: “A decision on the requests will be made as soon as possible.” Stories like this always pressure the Euro on fear of contagion.
• U.S. bank stocks were well supported yesterday on expectations that Goldman Sachs (GS), which will kick-off bank earnings season on July 14th, may produce record trading profits. But the US congressional Joint Economic Committee chairwoman Maloney warned last night that the $3.5trn commercial real estate market was a ticking “time bomb” that may lead to a second wave of bank losses. She worries in particular that more than USD 700bn will need to be refinanced before the end of 2010. The FDIC also showed reluctance to guarantee the debt of Citibank (C), on fears that it may not be a wise move for the taxpayer.
• And some bad tidings for the Euro with news that Bank of New York Mellon (BK), one of the world’s largest custodian banks, said concerns about the European banking sector had risen to their highest level since March and could put increased pressure on the euro, the FT reports. The bank, which holds funds of some of the world largest investors, like central banks, and funds of funds, said its own flow data showed net outflows from German bonds for the first time since mid-March. BoNY Mellon said it also tracked outflows from Italian, Spanish, Portuguese, Belgian and Greek bonds. Countries most at risk were Austria, Italy, France, Belgium, Germany and Sweden, which together accounted for 84 per cent of the exposure to a slowdown in emerging Europe. The paper quoted Simon Derrick, head of currency research of the bank, as saying that the euro area has lost its safe haven status, and is increasingly seen as a high-risk region among international investors.
• Gustav Horn, one of Germany’s best known economic forecasters, who is now the head of the IMK Institute, has warned not to misinterpret the first signs of economic stabilisation. According to FT Deutschland, he said one should remember the Japanese plight in the early 1990s, when the government cut the fiscal stimulus after the first signs of recovery. There is a now a danger that Germany would go Japan’s way into a multi-year stagnation. His forecast is for a fall in growth of 6.5% for 2009, and 0.4% in 2010.
• AIG was a big loser yesterday (down 21%) on a Citibank report that it may be worth diddly squat (why this is news to anyone is beyond me?).
  And yet despite this they are seeking clearance for ore bonuses. File under rewarding failure

The Dow at 17K by 2012 ?!?

Obama’s healthcare plan visualized

Government Motors Back in Action
Reuters reports that the artist formerly known as General Motors (GMGMQ.PK) is today prepared to exit bankruptcy with the message that a leaner and meaner automaker ready to win back American consumers and pay back taxpayers has emerged from its failure. A whirlwind 40-day bankruptcy for GM was expected to conclude with the closing of a deal to sell key operations and core brands, including Chevrolet and Cadillac, to a new company that will be majority owned by the U.S. Treasury. Chief Executive Fritz Henderson and Ed Whitacre, a veteran telecommunications executive and incoming chairman, were set to appear at a news conference 9 a.m. ET at the automaker’s Detroit headquarters to mark the launch of that “new GM.” The automaker’s U.S. sales dropped 36 percent during June when it was mired in bankruptcy and executives said the relaunch of the company offered a chance to try and break that negative association for consumers.

“I’m very much looking forward to the point where we’re operating in the clean air and the name of the company not being associated with bankruptcy,” GM sales chief Mark LaNeve said on Thursday. Henderson, who took over as CEO when his predecessor Rick Wagoner was ousted by the Obama administration at the end of March, has already detailed plans for a faster-moving and less-bureaucratic company with thinner executive ranks. GM is cutting its white-collar work force by more than 20 percent by eliminating 6,000 jobs by October. The reduction in executive ranks will slice deeper, with 35 percent planned. That bid to shake up GM’s long-criticized corporate culture will be a key issue for Henderson as the 100-year-old automaker seeks to relaunch itself. Steve Rattner, the head of the Obama administration’s autos task force, said earlier this week that it would be “natural” for Henderson to cut layers of management to make the company “a bit closer to the ground, leaner and meaner.”

Another pillar of the plan is GM’s commitment to launch more fuel-efficient cars and to focus its resources on fewer brands, models and dealerships.

GM has burned through $40 billion over the past four years and posted losses of more than $80 billion. The close of the court-approved sale would mark the completion of an unprecedented effort by the U.S. administration to save GM and Chrysler from liquidation by slashing debt, labour costs and dealerships. The White House has also disbursed almost $80 billion to shore up the auto industry, including $5 billion in support for auto parts suppliers. Of that total, $50-billion has been earmarked for GM, emergency financing that will give the U.S. government a more than 60-percent stake in the new GM. Chrysler exited bankruptcy a month ago after blazing a precedent-setting trail for GM by following an asset sale plan that gave operational control of the smaller automaker to Italy’s Fiat SpA (FIATY.PK) as part of the changes to be announced on Friday, Bob Lutz, GM’s outspoken and high-profile former product chief, has agreed to stay on in a new position, a person with direct knowledge of the plan said.

Lutz had earlier announced plans to retire at the end of the year. The new GM will have slashed its debt and healthcare obligations by $48 billion, dropped almost 40 percent of the dealers from an unprofitable network and moved to cut loose laggard brands such as Saab, Saturn and Hummer. The new GM will also take advantage of a new labour contract with the UAW that the company says will put its hourly operating costs on par with Japanese competitors led by Toyota Motor Corp (TM). Personally I’d think it will take a while before any sane person would want to even consider buying one of their crap American cars.

European Equities
Very quiet on the European equities front this morning with the only notable movers being Renault (RNSDF.PK) (down 3% plus) on a comment by CEO Ghosn that 2010 would be as difficult as 2009. This downbeat assessment is pressuring the whole auto sector early doors with Peugeot (PEUGY.PK) & Daimler (DAI) seeing some selling. But the big loser thus far is UK stock Bodycote (BYPLF.PK) (which provides heat treatment & metallurgical services to the car making industry) is off 15% after reporting ½ year revenues down 20%.

Oil producers are of course seeing some selling with the continued pressure on crude prices with Total (TOT) & Shell (RDS.A) leading the downward move in that sector. The only real bright spark comes from Dax component Infineon (IFX) whose shares are up about 4% on a story that they plan to raise Euro 725m via a discounted share sale at 2.15 with existing holders allowed buy 4 new for every 9 shares held. Ericsson (ERIC) have also been given a boost by news on a deal with Sprint Nextel (S) worth as much as $5 billion over seven years to the Swedish company

The British Peso
This year the pound has gained a reprieve after its sharp plunge in
2008. But is the real sterling crisis still to come? After all, the 1976 currency crisis followed on from sharp exchange rate falls in 1974-75. Moreover, with Britain’s current economic outlook bleak and monetary and fiscal policies very loose, there are some clear parallels now for sterling with the mid-1970s.
In 1976 the pound collapsed because policymakers failed to tighten fiscal policy as the economy recovered. This caused investors to flee sterling as they became unwilling to fund the UK’s fiscal and current account deficits. As a result, the IMF had to bail-out Britain.

To avoid a sequel, Britain must tighten fiscal policy when the economy recovers, and raise interest rates. Fortunately, politicians should tackle the UK’s huge budget deficit after the next election. Moreover they’re unlikely to alter BOE independence. But if a hung parliament in 2010 or high unemployment paralyses fiscal policy then sterling will face major risks again.

Data Ahead Today

• UK PPI, Jun (09:30 all times UK): The gradual improvement in demand and ongoing sharp rises in oil should see a 0.4% rise in the PPI.
• US trade balance, May (13:30): The trade deficit should narrow slightly to USD28b, which is less than half the average shortfall seen late last year.
• US import prices, Jun (13:30 ): Prices should rise by 2%, which would be the biggest increase since June last year.
• US Michigan consumer confidence, Jul (15:00): More tangible signs of recovery may be needed to bolster attitudes and sentiment should be little changed around 70.

And finally
From the Archive…..we’ve all done it at weddings

and……take care at work

Disclosures: None