Report from Europe: Waiting for Earnings-Fest

by: The Mole

The Dow broke out to a new 52-week high yesterday with the S&P 500 not far behind it in light trading. The major support came from tech names after upgrades by Deutsche Bank of the semi conductor sector and Barclays of the hardware space while the VIX declined to 23, a one-year low.

More importantly and raising a few eyebrows today is news that the day before they report earnings, Goldman Sachs (NYSE:GS) was cut to Neutral by the now independent uber bank analyst Meredith Whitney. Recall her “buy” call just before last quarter’s results was right on the money (and of course her now famous call on Citibank (NYSE:C) in 2007 when she foresaw a dividend cut and said they were in big trouble). Expect some softness on the back of this as when the Laura Croft of financial analysts speaks, folks listen.

Stocks reporting after the closing bell this evening include the bellwether semiconductor giant Intel (NASDAQ:INTC) (expected EPS $0.28) and specialty chipmaker Altera (NASDAQ:ALTR) ($0.19). We’ll also see the latest quarterly numbers from Dow Transportation component CSX (NYSE:CSX) ($0.71).

Before the open we had news from Johnson & Johnson (NYSE:JNJ), which beat the Street EPS estimates ($1.20 versus $1.13) mainly by slashing R&D expenditure by $250 million. Also a research note from Goldman Sachs talked of a positive “perfect storm” in M&A activity, citing inexpensive valuations, cash piles and accommodate finance. They highlighted 14 stocks which have a high probability of receiving a bid including Devon Energy (NYSE:DVN) and Citrix Systems (NASDAQ:CTXS). With gold and oil climbing as the Dollar falls, stocks like Newmont (NYSE:NEM) and Exxon (NYSE:XOM) will find a bid.

Today’s Market Moving Stories

  • Asian stocks edged up to a 14-month high, while the US dollar steadied, with some investors taking bets that third-quarter US corporate earnings, expected to shrink for the ninth quarter, will be good enough to keep a rally going. After a long holiday weekend, Japan’s Nikkei share average rose 0.4%, with electronics and car maker stocks providing the main support to the index. The MSCI index of Asia Pacific shares outside Japan rose 0.6% in choppy trading. The energy and financial sectors outperformed, while IT and consumer discretionary underperformed.
  • China’s business confidence index jumped to 120.1 in the third quarter from 110.2 in the second quarter, extending a strong recovery from an eight-year low of 94.6 in the last quarter of 2008. The business climate index rose sharply to 124.4 in the third quarter from 115.9 in the second quarter and 105.6 in the first quarter.
  • A PwC report states that Britain must raise taxes by £26 billion per year or cut public spending by 17% in the three years to 2013-14 over and above the measures proposed in this year’s budget. PwC believes that such measures are essential partly because it expects economic growth in coming years to be weaker than the Treasury forecasts underpinning Alistair Darling’s Budget.
  • The BCC’s quarterly survey shows that both UK manufacturing and services companies are confident of improving profits and turnover, albeit from a low base. However, the BCC said it was not clear cut whether there would be a slight contraction, or marginal growth in GDP in Q3. It said the survey highlighted the fragility of the recovery and the fact that the future was “fraught with danger”.
  • The BRC’s survey of UK retailing saw like-for-like sales rose 2.8% year-over-year in September, the biggest rise since April, when sales were bolstered by Easter. The value of total sales, which includes new floor space, was 4.9% higher than a year ago, also the biggest rise since April. “But we mustn’t get carried away. They are compared with a weak performance last September,” said BRC Director General Stephen Robertson. “Consumer sentiment is volatile and could weaken again.”
  • Back in Eurowonderland, the German ZEW growth expectations were down moderately this morning from 57.7 to 56. Notwithstanding the lower overall growth expectations reading, the sector outlook continued to improve in most areas in October. The data confirms the support of the recent pick-up in global demand for the German export sector. But the leveling off of the growth expectations together with the relatively weaker expectations performance for the auto and construction sector reminds us, that strong temporary factors are at work, which should increasingly fizzle out and partly become a drag in the course of next year.
  • On the foreign exchange markets SEK and GBP which have both come under pressure following softer than expected inflation data. In Sweden, headline inflation fell 1.6% year-over-year, while in the UK, CPI rose by only 1.1%. Both Sweden and the UK face considerable hurdles in the form of large output gaps which are likely to prevent both the Riksbank and the Bank of England from hiking rates anytime soon. And the Dollar continues to be pummeled by the Euro. EUR/USD has broken resistance at 1.4845 opening the way for a move to 1.4968. The target is now 1.5285.

The UK Housing Market Continues To Improve
House prices in England and Wales rose in September at their fastest rate since the credit crunch began more than two years ago, the Royal Institution of Chartered Surveyors said. About 22% more surveyors reported price rises in the three months to September than price falls, up from 10% in August, beating the consensus forecast for a reading of 16% and posting the highest mark since May 2007. The findings tally with surveys from mortgage lenders which show that a combination of record low interest rates and tight supply are helping to reverse some of last year’s hefty losses in property prices.

Figures from the Halifax last week showed prices have risen almost 6% since April but are still nearly 5% lower than in September last year. The RICS survey showed new demand was continuing to outpace the supply of property onto the market. That helped the sales-to-stock ratio, a gauge used by analysts to predict future price moves, rise for a ninth consecutive month to its highest level since December 2007. Moreover, surveyors were increasingly confident that prices would remain on an upward track, with a balance of 25% expecting increases in the next three months, up from 18% in August.

Equity News

  • CIT Group (NYSE:CIT) is seeing little interest in its debt exchange offer and is increasingly likely to file for bankruptcy. The company said earlier this month that it was looking for investors to approve a large debt exchange that would reduce its borrowings, or approve a prepackaged bankruptcy. But investors in CIT securities said it is possible that the company will not find enough debt holder approval for a prepackaged bankruptcy, which requires sufficient support before the company files for protection from creditors. Instead, CIT might have to aim for a pre-negotiated bankruptcy, which requires less support before the actual filing.
  • Capmark Financial, the commercial real estate company created through a 2006 leveraged buyout of certain GMAC assets, is preparing to file for bankruptcy possibly by the end of next week. The company, which owns a bank that will continue to operate within bankruptcy, is in negotiations with lenders, bondholders and the FDIC. Last month they said that stockholders had negative equity of $1.14 billion as of June 30.
  • Élan (NYSE:ELN) reports Q3 numbers on October 21st. The shares are now trading below the $7 level when the J&J agreement was signed, driven by concerns surrounding Tysabri (PML risk and new competition in 2010/11). Although I accept that Tysabri trends can be volatile, in my view much of this anxiety is already acknowledged in the price. In overall terms, Davy’s forecast 12% growth in Élan revenues to $299.5m and a switch from a $1.6 million adjusted EBITDA loss to a positive out turn of $16 million. Separately, the market will watch for any Alzheimer’s-related commentary as J&J releases Q3 results before the US market opens today.
  • In a positive development for Dragon Oil (OTCPK:DRAGF), Turkmenistan’s leader dismissed the head of its state oil company. Turkmen President Gurbanguly Berdymukhammedov called for faster development of oil and gas fields and criticized the poor quality of energy infrastructure. Dragon Oil operates oilfields located in the Cheleken Contract Area offshore Turkmenistan, in the Caspian. The group’s average field production rate for H1 2009 from the Cheleken Contract Area was 42,808 bopd.
  • Barrick Gold (NYSE:ABX), the world’s largest gold miner, has agreed to purchase Xstrata’s (OTC:XSRAF) controlling interest in an undeveloped copper and gold project in Chile for $465m in cash. Xstrata is currently facing an October 20th deadline to formalize and offer for Anglo American and there is speculation that this cash could be used to offer a cash-and-share premium to Anglo shareholders. Some analysts, however, have rejected and this and suggested that the sale is Xstrata tidying up its portfolio. Charlie Sartain, head of Xstrata’s copper division, said that the sale will allow them to focus on “priority development projects”.
  • Basic resource stocks are all up for bids as the price of copper, lead, nickel and silver all rose on the LME Tuesday morning.
  • In the game of broker upgrades, Tat & Lyle was today’s chief beneficiary rising 5.5% on the back on an “outperform” rating at Credit Suisse.
  • ITV has announced that it is to do a £120 million convertible issue maturing in 2016, which will have a coupon anticipated to be between 4% and 4.75%. This will extend the company’s maturity profile and give the company low coupon financing. The stock is up 8% today.

And Finally… Chinese City Skylines May Not Be All They Seem

Disclosures: None