Report from Europe for Friday, Sept. 4

Déjà vu, another up day, another down volume day, with the now almost self fulfilling spike into the close led by yet another AIG (AIG) short squeeze! This dodgy $2 bankrupt stock spiked 5% into the close and continues to lead the Dow around like an innocent puppy on a lead. This allowed the S&P 500 to close back above the psychological 1000 level. But all very suspicious and dubious. As many have noted, the rally has been led by low quality stocks, and as Jimmy Cliff once crooned, “the harder they come, the harder they fall” when the tide turns.

Gold made further gains overnight, coming close to testing $1000 at one point. There’s some talk on the screens and in the blogs about potential purchases by China as part of its reserve diversification strategy.

And what of the Non Farm Payrolls report, fresh off the presses? Well, it’s not a game changer, but a bit of a damp squid this time. Sure, the headline number (at -216k job losses) was a shade better than expected (with the smallest job loss in 12 months) as layoffs are slowing and wages are showing remarkable resilience, but if you add the back revisions in of -50k for June and July and note that the unemployment rate now stands at a 26-year high of 9.7%, it sure loses its lustre. The terrible news was the 392k drop in the household survey measure of jobs, which explained the sharp jump in unemployment from 9.7% to 9.4%. I think the market will fade the initial kneejerk move higher ahead of the long Labor Day weekend. Retail stocks won’t like this number.

Something For The Weekend, Sir
The other focus is the meeting of G-20 finance ministers and central bank governors in London today and tomorrow. Policymakers can certainly take credit for steering their economies away from recession, but the concern amongst many investors is that all these stimuli do is merely mask a still very fragile underlying situation. The greatest threat to investor confidence at this stage therefore is any suggestion that the consensus around the need to maintain emergency economic policies is unravelling. To judge from the extremely conservative growth projections which the ECB laid out yesterday, none of the major central banks are even close to thinking about normalising policy. Unfortunately there is somewhat more uncertainty on the fiscal side as those countries such as Germany which were reluctant to engage in fiscal stimulus in the first place, return to economic growth and may find it hard to resist the traditional lure of fiscal consolidation. For now this is a manageable risk for recovery trades, but one that can only grow through time.

Please Exit Slowly
In a speech yesterday evening we heard a very dovish tone from the influential Dallas Fed’s Fisher: “The risk to price stability is a deflationary risk, not an inflationary one.” Fisher predicted a modest near-term recovery, but also “a prolonged period of sluggish growth and uncomfortably high unemployment.” Meanwhile the US Administration is proposing new international liquidity and capital standards for banks, in a (due) move that risks keeping bank lending standards relatively tight for years. In China, the banking regulator is refusing to allow lenders with a capital adequacy ratio of less than 9% to expand their business. The ECB’s topman JC Trichet does a good job in promising that the ECB will keep both inflation expectations and trends under control. Note how he sounded remarkably cautious at yesterday’s ECB press conference. My feeling is that he was ticking off the recent idiotic outpourings from the ever incompetent German finance minister and the French halfpint that the coast is clear and it's time to take away the punch bowl.

One That Seems To Have Slipped Under The Newswires Radar
But the VDMA, Germany’s major business association of machinery and equipment builders, said that it expects production to decline by 20% yoy in 2009. This is a downbeat forecast, given that the association so far had forecast a decline of between 10 to 20% yoy in the current year, and it expects stagnation in 2010 and further job losses in the industry. Are you reading, Mr Peer Steinbruck?

Equity Briefs
European indicies got an early shot in the arm as analysts raised their end of year targets for the various markets. Goldman Sachs strategists raised their year-end forecast for the Stoxx 600 to 260 from 235, citing upgrades to economic and earnings growth estimates. UBS AG strategist Nick Nelson increased his target for the FTSEurofirst 300 Index to 1,100 from 1,000.

Metals and mining stocks are again performing well today. Lead, the best performer on the London Metal Exchange this year, rallied to the highest price in almost 16 months as China vowed to shut substandard smelters after thousands of children were poisoned. Copper, alumiium, nickel and tin also advanced. Platinum producer Lomin is up another 4.5% today as is copper producer Kazakhmys after a Morgan Stanley upgrade to overweight.

Deutsche Telekom has started talks with Vodafone, France Telecom and Telefonica about selling its T-Mobile UK unit.

Automakers are also looking perky today. Peugeot Citroen is 5% stronger ahead of a meeting between the firm’s CEO Varin and his opposite number at Mitsubishi to “deepen” cooperation between the two companies in the development of electric cars. Daimler is also finding support after saying that it had no plans to cut jobs or production at the moment and that the company plans cost saving measures worth more than €4 billion.

US stocks which may be active today include Novellus (NVLS), which in a conference call forecasted that its order book may rise by as much as 55% as chip demand recovers, and trendy teen retailer Abercrombie & Fitch (ANF) after it was cut to a sell at Citibank, which sees sales continuing to fall.

Fyffes (FYFFF.PK) has reported a very strong 25.6% rise in adjusted eps (to 4.46c) on foot of a 16.4% lift in adjusted earnings. The dividend is up 10% (to 0.55c) while net cash balances have increased by 25% to €40.4m. Of even greater importance, the group has raised its full year profit guidance for the second time in six months,

Elan’s (ELN) stock is under pressure today, slipping to €4.95, after a US judge ruled the drug company breached a contract with Biogen Idec (BIIB) by entering into a transaction with Johnson & Johnson (JNJ).

And Finally…
A constant stream of “experts” flow through the financial media. How do those with poor track records stay in the public eye? Here’s a little introductory lesson for those more interested in avoiding charlatans.

On the unhappy anniversary of Lehman’s demise the Guardian has a nice interactive piece on the history of the crisis’s timeline.

Bob’s Back

Disclosures = None

Comments

[Mad Hedge F...:]

igitn. So who was the dummy that waited until August to lay off their workers? Fire the bastard! Apparently, there are a large number of managers out there who don’t read newspapers, watch TV, or talk to anyone, and waited until the Great Depression was nearly two years old to cut costs. That is one of many conclusions I am forced to draw on the news that the August non-farm payroll showed a further hemorrhage of 216,000 jobs, better than the 230,000 consensus, and a big improvement over the 273,000 July figure. But it included downward revisions of 50,000 in June and July, not good. The unemployment rate came in at 9.7%, continuing its relentless march towards double digits. The net net is that the economy has jumped off the top of the Empire State Building, but is now plummeting towards 5th Avenue and the meat wagon at a slower rate. The usual culprits were there; 65,000 jobs lost in construction, 63,000 in manufacturing, and 27,000 in finance. What was truly amazing to me was to see losses in education at the start of the school season. And what is going to happen to the 1.5 million who will exhaust their unemployment benefits by year end? The figures are all proof that there will be no economic recovery without bank lending. Running a business without credit is like trying to complete a marathon while holding your breath. Bring on the “L.” My many US Navy readers should seriously consider re-upping, as the economy will not see net hiring for a very long time. Just hope we don’t invade anyone new.

Sep 04 12:54 PM

[Titus:]

Super post, as usual. Very readable, and good perspectives. Loved the 'damp squid' comment! Will it enfold us in it's testacles....?

Sep 04 01:07 PM

[Pax Americana:]

Great stuff, Mr Mole .

Sep 04 01:32 PM

[whidbey:]

Fair comments, but hardly relevant to the meaning for America.

The EU thinks they have gotten the upper hand on recession effects and can quickly return to "normal" interest rates and productivity of better times. This is dangerous for all.

The American government has not got a chance of escaping Hobson's choice. No longer can we inflate to pay the bills, or default on obligations, or some combination of the two. The US has not got those three choices open. We have one open: Hobson's.

The sole choice is end the Congressional spending and turn the money loose on the consumer in various ways and hope for a recovery in 12 months. In the meanwhile where does the EU go for growing markets for its export goods? Cut prices and maybe the emerging economies will take some. All at the price of no or few sales to the USA (20% of the EU traditional market). It is bleak.

The EU is ready to do to the whole US what UK did to the US on its Libya prisoner swap: Lie, ignore the long run and wish the US the best and all that, you know. We are suckers being abandoned - Not that we don't have it coming.

Sep 04 02:53 PM

[TinyTim:]

LOL on the floor. Bob's Back.
This guy could sub for Cramer or the ShamWoW pitchman.

Have a good weekend

Sep 04 08:20 PM

[Bruce Krasting:]

There are a number of videos out there of angry people. In a way it is humor but it is not. There is nothing funny about it. There are many people out there that are as mad as this guy. They may not be doing Utube videos, but they are just as hot under the collar.

My guess is that something else is going to happen. Not sure what. My guess is that shortages of certain things is going to take us over the top. No sugar, no gas, no health care, no police, rising crime another recession. Something is going to give. We just have too many wobbly legs for us to miss the next bullet.

When 'that' happens we will have real anger and it just might spill over to the street.

The net result will be a wave of debt repudiation. It will become an avalanche of "no pays". Hang on, we are just starting the anger phase of this in America.

Sep 05 08:31 AM

[D Lesh:]

Bull Markets start from the bottom and then up. That may be why you see what you consider low quality stocks rallying. Once they fill out, the big caps can rise with a solid base under them.

Walls of worry are climbed to new highs each week.

Sep 05 10:23 AM

[LJR:]

As a followup to Bruce Krasting's comment above, there was an article in 'Science" years ago that said much the same thing, but in regard to world crises. It is the idea of a cumulative effect, where events build up and a small event can push things over the top. I personally don't feel any fear over this, just a sort of numbed waiting for the final shoe to fall. A lot of good people are working to prevent the shoe from falling, but then similarly good people probably had at least something to do with putting us into this situation in the first place.

If a finale comes, it will probably be when people try to make a mass exit following some final event, and at time when there is little to stem the flow. All sellers and few buyers. Maybe just pessimism though, lacking a little faith. We all hope for better days ahead.

Sep 05 01:56 PM

[Aaron Ashcraft:]

I agree with D. Lesh: Bull markets climb a wall of worry.

I am not saying we won't have a correction: of course we will, BUT when literally 99% of talking heads/financial writers are forecasting a huge sell off, it is likely they are wrong! I have 35% of my portfolio in cash, waiting for a correction - but I do not believe another March catastrophe is in the cards. Unemployment is 9.7% - not a surprise - but 63% of Americans are in very good financial shape.

My bet is the S&P will see 1075 or 1100 before we experience a 10% or 20% correction. The assertion that the market is being led by low quality stocks is a half truth, at best. APPL, BRK.A, XOM, PBR, GOOG, MSFT, GS are HIGH quality stocks. All are up substantially, along with the market.

Sep 05 06:13 PM

[Jan Paul:]

On Sep 05 06:13 PM Aaron Ashcraft wrote:

> I agree with D. Lesh: Bull markets climb a wall of worry.

I am not saying we won't have a correction: of course we will, BUT when literally 99% of talking heads/financial writers are forecasting a huge sell off, it is likely they are wrong! I have 35% of my portfolio in cash, waiting for a correction - but I do not believe another March catastrophe is in the cards. Unemployment is 9.7% - not a surprise - but 63% of Americans are in very good financial shape.
===================
I would agree if this was an "inventory recession" like all have been since WW II.

But, this is a Credit Recession which is what the Great Depression is. "Happy Talk?" They had it then too during their rally before the market went down for two more years.

quote:
# "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
- Herbert Hoover, President of the United States, May 1, 1930

"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
- HES May 17, 1930

"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930


# "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
- HES June 28, 1930


# "... the present depression has about spent its force..."
- HES, Aug 30, 1930


# "We are now near the end of the declining phase of the depression."
- HES Nov 15, 1930


# "Stabilization at [present] levels is clearly possible."
- HES Oct 31, 1931
----------------------...

This recession or depression is fueled by too much consumer, corporate, city and state debt that takes years to get back down to a manageable level.

78 million boomers and 37 million retirees have just made a major shift in how they spend and they won't be going back to the old way in our lifetimes.

70% of GDP was only achieved through debt spending the exceeded income. The old "normal" was about 62% of GDP and if we are lucky, we will have that again but, that means years of lower GDP and lower spending and lower sales tax revenues and lower payroll tax revenues and lower corporate and income tax revenues while deficits remain high and interest on debt consumes more and more of the tax revenues that go to the Federal Government. The CBO estimates the interest on debt will quadruple to over $820 billion or more than we collected in the last year from both Corporate and Individual tax receipts.

Even at a 4% GDP growth rate fueled mostly by government spending, the private sector can no longer keep up with the cost of government and debt.

Sep 05 11:24 PM

[Dave Wrixon:]

Nup, until you start to address the Federal Deficit you are firmly stuck in the Denial Phase.


On Sep 05 08:31 AM Bruce Krasting wrote:

> There are a number of videos out there of angry people. In a way
> it is humor but it is not. There is nothing funny about it. There
> are many people out there that are as mad as this guy. They may not
> be doing Utube videos, but they are just as hot under the collar.
>
>
> My guess is that something else is going to happen. Not sure what.
> My guess is that shortages of certain things is going to take us
> over the top. No sugar, no gas, no health care, no police, rising
> crime another recession. Something is going to give. We just have
> too many wobbly legs for us to miss the next bullet.
>
> When 'that' happens we will have real anger and it just might spill
> over to the street.
>
> The net result will be a wave of debt repudiation. It will become
> an avalanche of "no pays". Hang on, we are just starting the anger
> phase of this in America.

Sep 06 03:41 AM

[MSimon:]

Squids are normally damp. They live in the ocean.

A damp squib is a fuse or explosives initiator that does not work because it is wet.

Sep 06 01:51 PM

[maelstrom:]

Can t judge abook by its cover..Muddy Waters/Willie Dixon... The market is being pumped and is on life support ..a correction has to come, but they can keep this dumb ass narrow box trading range going for a long time..One big Hedge starts to unwind positions and poof.. the shreder, then another run up.. and another wave down..it's kick the can down the road till as mentioned before , a trigger, what ever it is sets a huge drop..could be a riot in central LA..it s due ..My good Mole you are spot on.

Sep 06 07:44 PM