Another Golden Day for Stocks

Bears got bulldozed again Tuesday as investors seem to have returned from summer holidays and that Labour Day BBQ with a mind to add to risk as the traditional September sell in stocks off has failed miserably to make an appearance thus far.

The question at top of the minds of investors is what is driving this hunt for return – is it the economy, positioning and/or liquidity. Liquidity and positioning remain a big part of the equation as I have been discussing. Portfolios are still full of cash, if just a bit less. So the implication is that this hunt for return can continue for quite a while yet as the underinvested are forced to capitulate. And all the more so if growth is set to be low for many years to come, but no depression. Anaemic growth, low inflation, and near zero rates, with the authorities standing by to rescue any fallen star. That looks a good cocktail for adding risk.

Today’s Market Moving Stories

• According to the FT, ratings agency Moody’s will Wednesday confirm that the UK’s rating will remain at AAA. The report cites the credibility of the Treasury and BoE, affordable debt levels and resilience of the rating. Cross-party support for addressing deficit levels in future years is another factor. In truth the rating had never been in doubt but it should provide a boost to confidence in the gilt market which had previously been spooked by the negative outlook from the excitable and overly subjective analysts at Standard and Poor’s who have a far more bearish view of the UK (Spain and Ireland also) than the more sanguine and objective Moody’s.
• China Investment Corp (CIC), the $200 billion sovereign wealth fund, is eyeing investment opportunities in infrastructure, green energy and other forms of innovative energy transmission, said Zhou Yuan, a senior CIC executive. The price gap between buyers and sellers is narrowing for infrastructure assets, but assets are still not cheaply priced. Zhou said CIC’s role is often misperceived outside of China, adding that the sovereign wealth fund planned to be.
• The parent of China’s Geely Automotive will bid for Ford-owned carmaker Volvo with a domestic investment firm. Geely’s chief executive Gui Shengyue was quoted at a news conference as saying the company would make the joint bid but did not disclose the name of any local investor.
• Calculated Risk, my favourite source on the US housing market, has an interesting story about possibly the next crisis hit the US property market: interest only-loans, where the mortgage holders only pays interest for a given a number of years, while deferring repayments. Such loans only work for the holder if the absolute rise in the property’s value exceeds the outstanding loan, but as property values have crash in the US. These types of loans are non-performing almost by definition. And in many cases, the “interest-only” period is ending, triggering large increases in repayments. Here the basic statistics on what lies ahead: “the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.”
• Briefly on what the new FASB rules governing structured finance on bank balance sheets means for further capital requirements. FASB’s new accounting standards, FAS 166 and FAS 167, will basically require banks to bring structured finance transactions on-balance sheet and removes the concept of qualifying SPEs. Such action would inevitably increase the risk in bank balance sheets and require at least some banks to raise more risk-based capital as offset. The implementation appears to be going ahead without delay beginning after November 15. Seriously bad news for banks profitability, particularly the more leveraged names who operate off a small equity base.
• Bored at work. Play Monopoly against users worldwide using Google Map on Google’s Monopoly City Streets.

For A Few Dollars Less
USD weakness was the overriding theme yesterday. USD marked 2009 lows against EUR, CHF, AUD, and NZD not to mention in trade-weighted terms. It was notable that USD weakness was accompanied by a rally in Gold, which traded above $1000. This may suggest that inflation fears have and falling real yields (three-month USD Libor fell to a record low of 0.3% making it the cheapest funding currency) are once more weighing on the dollar. Inflation expectations, as implied by the spread between TIPS (inflation linked bonds) and US Treasuries, have risen modestly in recent weeks, albeit still holding to their well-defined ranges. When thinking about the tail-risk for currencies the most negative for the dollar is a more generalized deterioration in inflation expectations which the Fed is prevented from fighting by the exceptionally high level of unemployment. By contrast the most dollar-positive risk scenario is a double-dip recession.

Neither A Borrower Nor A Spender Be
In the US, consumer credit outstanding was down a seemingly alarming $21.6bn in July – a record decline. Since July last year credit has declined $109.3bn or 4.2%. Yet whilst intuition may suggest otherwise – especially in the current environment – consumer credit tends to be a lagging indicator of the state of the economy. In fact remains, the consumer credit cycle tends to lag even non-farm payrolls as an indicator of the economic cycle according to research by Deutsche Bank. However what they fail to grasp is that this is happening at a time when the savings rate is going through the roof. So it’s a double whammy. The next few retails sales reports will be watched very closely by the market. The consumer accounts for 2/3 of the US economy and as long as he / she chooses to keep a padlock on their wallet we are not on a path out of the woods to self sustainable economic growth

Staying in the US the NFIB optimism index, measuring confidence amongst smaller businesses, rose 2.1 points to 88.6, essentially reversing the countertrend deterioration seen over the past two months. But the ABC/WP index of consumer comfort fell 3 points last week, with respondents taking a dimmer view of their personal financial situation.

Equity News

• Vivendi have Wednesday morning announced that they have launched an “amicable” tender offer to acquire Brazilian telecoms group GVT which values the entire group at around €2bn. The offer is conditional upon Vivendi acquiring a minimum of 51% of the shares. The two leading shareholders have agreed to tender a minimum of 20% of their 30% shareholding. It seems unlikely that Vivendi will have to shell out the full €2bn (as not all the shares are likely to be tendered), in the near term at least. This deal is much more modest than either the Zain or (rumoured) Djezzy transactions. As a result, Vivendi may not have to raise equity nor make disposals in order to maintain their mid BBB ratings, which they have stated they are committed to maintaining. The stock is weaker today.
• Bank of Ireland has announced that it is looking to issue a five-year covered bond that would provide much needed duration to its wholesale funding (currently 75% less than one year). The deal is going very well and should amount to €1.5bn in new longer term funding. The move is another sign that markets are thawing and while it is still a secured form of funding (backstop is the pool of mortgages initially and then the bank), it provides an alternative to issuing new senior debt funding under the government guarantee. I understand that the extension of the guarantee is due to be announced early next month and the rumour is that there will be a 50bps fee involved.
• Lonmin slipped 2% to 1,677 pence on a Bank of America downgrad of the shares to “neutral” from “buy” and said that a bid for the third-biggest platinum producer by Xstrata is “not a sure thing.” Xstrata fell 1.4% to 868 pence.
• Pennon, Foreign & Colonial Investment Trust and Balfour Beatty are poised to leave the U.K. benchmark FTSE 100 Index, according to Societe Generale analysts. Segro, Whitbread and Rentokil Initial will replace them as the results of a quarterly review by FTSE Group are released after the stock market closes today. The changes will apply after the close of the UK market on Sept. 18.
• Oil and gas producer BG Group shares are up 3%+ after announcing that the Guara discovery in the Santos Basin pre-salt, offshore Brazil, is estimated to contain recoverable volumes of 1.1 billion to 2 billion barrels of oil equivalent.
• BMW has been active to the upside following an upgrade to overweight at Morgan Stanley and a buy rating from RBS. Shares in automakers more generally Daimler, VW and Renault are all trading bid today.
• US broker upgrades of note. Citigroup have upped Mastercard (MA) and Capital One (COF). eBay (EBAY) is looking perky after Sanford & Bernstein said that the company’s core business “was turning around”. Morgan Stanley should see some interest after an upgrade at JP Morgan who are switching their preferences within financial stocks to “credit banks” and away from investment banks due to regulatory changes.

After The Gold Rush
The RSI for gold is beyond levels that have seldom failed to induce a sharp retracement in prices. The price of the yellow metal has now steadied around the psychological $1000 level – having put in a $50 rally over the last week or so and is seemingly poised to take on the 2009 high of $1005.40 posted back in February (which was exceeded, but only fleetingly, yesterday). However, understanding the forces behind this move is key to appreciating the metal’s potential to revisit its all time high recorded back in March last year above $1030.

Of course, it would be remiss not to begin with the role of the USD as a force behind gold’s ascent. Over the past four years, there has been a c. 70% inverse correlation between the USD index and the USD price of gold on a weekly basis and the USD’s fortunes would certainly appear to have taken a turn for the worse in recent days.

Although accurately assessing the various contributions to gold’s recent rally is an exercise in futility, it nonetheless seems that talk of central bank reserve diversification – on the part of China in particular – may have been one key, additional influence on prices of late. Certainly, talk of central bank demand was reported at the end of August just as gold prices breached the August peak of $965 – a fact that (true or otherwise) inevitably entailed the presumption of China’s involvement (it is well known, after all, that China’s holdings of gold have risen by circa 75% since 2003). It is certainly possible that this association may have been more strongly held of late given suggestions that China’s long-held desire to reduce its exposure to US debt and the USD may be taking on more urgent proportions in view of the US Treasury’s hazy plans for fiscal consolidation.

And Finally… Seems So Naïve Now

Disclosures: None

Comments

[NUCLEAR1929:]

i expect last hour selling today followed by selling tomorrow

Sep 09 01:43 PM

[manya05:]

You are right Mole, the government punishes you for saving and being thrifty. Retirement accounts were decimated in 2008 and many may be just chasing a quick buck trying to claw back to being even (not realizing that it is merely inflation what is driving the value of the 401k higher). Indeed a toxic cocktail out there.

Sep 09 04:16 PM