Preview from Europe: Another Day of Defiant Resilience

Weakness in Asian equity markets set the scene for a weak European session and a soft opening in the US. But the early US losses were steadily erased to leave the Dow Jones with its eighth consecutive positive close yesterday. The market was led higher by the financials, even as the FDIC added 111 lenders to its list of banks (now 416) that fail to meet its grading system for asset quality, liquidity and earnings (the most since Q2 ‘94). The basic materials sector was also solid as commodities rebounded, helping to drive the commodity currencies higher. Trade volumes remain comparatively low but not out of line with what one would normally see at this time of the year. One gets the feeling that if equities don’t weaken in September as most would seem to expect, there could be a mad scramble to cover shorts in the final quarter, driving equities to levels that would have seemed inconceivable earlier this year.

People often wonder why September is traditionally such a lousy month for stocks. The US tax system provides at least part of the explanation as the tax year for mutual funds closes at month end giving fund managers an incentive to sell loss making stocks to offset capital gains on their portfolio.

Today’s Market Moving Stories

• Overnight Asian stocks rose, led by consumer and technology-related shares as confidence in a sustainable recovery grew. Stocks of companies involved in making parts for technology exports, such as Shin-Etsu Chemical in Japan, Taiwan Semiconductor (TSM) and Samsung Electronics (SSNLF.PK) in South Korea, gave a big boost to their domestic indices. Japan’s Nikkei share average rose 0.5%. However stocks in Shanghai bucked the trend and dropped 3% on worries about a fall in bank lending.
• Japanese core consumer prices fell at the fastest annual pace on record in July and the slide broadened on weak final demand, potentially putting pressure on a reluctant Bank of Japan (BOJ) to rein in a deepening deflation. The politically sensitive jobless rate also hit a record high 5.7% ahead of Sunday’s election, which the opposition Democratic Party looks set to win, reinforcing the view that the BOJ will keep interest rates low to support a fragile economic recovery. In a sign that deflation is becoming more pervasive, the so-called core-core consumer price index, which strips out food and energy costs, marked its biggest annual fall in seven years. And in further bad news, Japanese household spending fell 2% in July from a year earlier, compared with a median market forecast for a 0.5% fall.
• Chinese industrial profits in a wide sample of provinces declined 17.3% in the first seven months from a year earlier, a slower pace of decline than a month earlier, the National Bureau of Statistics (NBS) said. Profits in the same group of 22 provinces dropped 21.2% in the first half of the year, the NBS said. The 22 Chinese provinces represent 78.6% of industrial profits in China.
• The US economic contraction in the second quarter was not as bad as expected, and gross domestic product (GDP) actually grew if inventories were stripped out. This has raised hopes that pent-up demand for Asia’s exports would return slowly.
• British consumer sentiment was unchanged for a third successive month in August and showed continued caution about the economy, a survey by pollsters GfK NOP for the European Commission showed. Shoppers’ assessment of the economic outlook and willingness to make big purchases worsened slightly, outweighing modest improvements in their view of the past year, leaving the headline index steady on the month at -25 versus -36 a year ago. “While UK consumers are still cautious about the economy, they are less pessimistic than this time last year,” said GfK NOP spokeswoman Rachael Joy. “Recent reports of housing market improvements and economic recovery may well be lifting the public confidence,” she added.
• As an example of what happens when the punch bowl gets taken away, consultancy Roland Berger reckons that up to 90,000 jobs are at stake in the German car industry and 50% of all car dealers are threatened by bankruptcy once the car scrapping scheme expires.
• A very interesting piece from Morgan Stanley’s equity guys in which they identify the four stages of the typical secular bear market and its aftermath.
• Desperate times, desperate measures. In a manoeuvre that emphasises California’s desperate finances, officials have been frantically preparing this week for a two-day sell-off of items drawn from every corner of the state’s pack-rat bureaucracy.
• If ever there were living proof that identity theft can strike the mighty and powerful as well as hapless consumers, look no further than the chief banker of the US: Ben Bernanke. The Federal Reserve Board chairman was one of hundreds of victims of an elaborate identity-fraud ring, headed by a convicted scam artist known as “Big Head,” that stole more than $2.1 million from unsuspecting consumers.

Equity News
A quiet start ahead of a London Bank holiday so likely to be quite thin today. That said, Dell’s (DELL) result after the bell last night has cheered tech stocks (Infineon (IFX) in particular) and higher metal prices are lifting mining stocks this morning. Cosmetics maker L’Oreal (LRLCY.PK) is up sharply after two broker upgrades and reporting healthy profits yesterday.

Davy’s have upgraded their EPS forecasts for drinks company C&C this year and next following the ABI/Tennent’s deal and the positive trading statement to 19.8c. They point to a survey by UK trade magazine The Publican of more than 500 licensees which asked what brands licenses they most wanted to stock and which helped them most in their business. The top-three brands in 20 different drinks categories were selected. Cider was categorised under two headings – draught cider and flavoured cider. The results were encouraging for C&C’s Magners divison. Magners Pear was rated number-one in flavoured ciders.

First-half results from Grafton were predictably weak and fully reflect exceptionally difficult trading conditions in both the UK and Ireland. However, there continues to be good news in relation to cash generation and debt reduction, while Grafton’s outlook comments are also becoming a little more hopeful, especially in relation to the UK.

Data Ahead Today
At 09:30 BST (all times UK), a second stab at Q2 UK GDP will be released. Normally not a market-moving event as revisions are typically minor, growth should be revised from -0.8 to -1.1% given weaker business investment (all the components of GDP should contract, with only Government and inventories adding to growth), which should reinforce the MPC’s dovish stance.

In the US at 13:30, personal consumption for July is out. Better-than-expected employment data point to personal income increasing by 0.1%. Spending should be modest, up 0.2%.

At 15:00, the last attempt at the US Michigan consumer confidence for August should show that sentiment moved higher to 64.5.

And Finally… An Icelandic Banking Ad From The Days Of Wine And Roses

Disclosures: None

Comments

[WCN:]

Was that Kaput thinking? LOL!!

Kaput–adjective Slang.
1.ruined; done for; demolished.
2.unable to operate or continue: The washing machine is suddenly kaput.
—Idiom
3.go kaput, to cease functioning; break down: The old car finally went kaput.
dictionary.reference.c...

Aug 28 07:03 AM

[manya05:]

That video reminds us that is high time for students in business, finance, and economics, to receive early and intense exposure to the physical sciences. Any scientist or engineer knows that, yes, we can dream and shoot higher, but it will be difficult as we have to content with Nature (there is always a gravity, we can work around it, but we cannot fully escape it). These banksters obviously believe that you can get something for nothing, that there is no underlying fundamental law that will bring you back down, that because you grew at 100% clip each year for 8 years, you can keep doing it forever (reminds me of the Chinese economy). At some point, even weeds run out of resources and stop multiplying.

Aug 28 08:27 AM

[prudentinve...:]

Great summary as usual.

".... One gets the feeling that if equities don’t weaken in September as most would seem to expect, there could be a mad scramble to cover shorts in the final quarter, driving equities to levels that would have seemed inconceivable earlier this year...."

At this point, I view economic fundamentals as negative and the only way to reverse the trend is to create an illusion by driving the markets up. I therefore fully agree with your statement, and expect TPTB to drive equities up in September and October, because many are then expecting "the correction" and will be short, and this will be an opportunity to punish the shorts and liquidate them.

If, like me, you are taking profits, do so slowly and make sure you profit from the engineered rally coming this fall. Eventually, fundamentals do catch up, but the correction will not occur on a widely expected schedule.

Aug 28 08:39 AM

[Joe Shareho...:]

The fundamentals always win, look for flat Sept and Oct trading and then November we tank

Aug 28 08:54 AM

[frosty:]

That's one of the most inspirational ads I have ever seen. So all we have to do is think the market will go up and it will! Let's all do that!

Aug 28 09:04 AM