Report from Europe: Good 'Earnings' Versus Dodgy Economic Data

Traders clearly found much to be positive about in their weekend readings for markets, which begun the week on a very positive note Monday. Key European bourses reversed Friday’s losses and the S&P 500 hit another new high, lifted by solid gains in industrials, utilities and consumer cyclicals after the release of further Street-beating earnings reports and some positive broker commentary. And to top it off, Bloomberg is reporting that PIMCO, the world’s biggest bond fund, is considering starting up a stock fund. Apple (AAPL) was the star of the show after the bell eclipsing the expected $1.42 EPS with a $1.82 print. The stock was up 8% after hours.

The positive tone seen in equity markets has carried through to other markets. Commodities are up across the board, perhaps helped by Monday’s comments from China suggesting that data due later this week will affirm that it is on track to achieve its growth target of 8% for this calendar year. Credit spreads have narrowed and the VIX has closed at a new low. In FX markets we have seen a further general weakening in the Dollar, with the stand-out performers being the Kiwi and the Aussie Dollars. The former is up an especially impressive 2.2% over the last 24 hours and is now up 52.9% against the US Dollar since risk attitudes turned positive in early March.

One disappointment for me was the one point pull-back in the NAHB homebuilder’s index in October, with a reduction seen across all key components. This is especially disappointing given that the level of the index remains consistent with very soggy consumer spending.

But the biggie household names corporate earnings reports Tuesday afternoon from DuPont (DD), Bank of NY Mellon (BK), Pfizer (PFE) and star Caterpillar (CAT) (which also raised guidance) have beaten up the lowly expectations of yet more foolish looking “analysts.” One wonders what they spend their time actually analysing as you’d be as well off reading your horoscope or Granny’s crystal ball. So another up day in prospect? Well the markets' enthusiasm may be tempered and sapped by some fairly deflationary looking PPI numbers released at 13.30 along with an unexpected fall in building permits and housing starts (Pulte (PHM) and Horton (DHI). etc are likely to be soft). Banking stocks may be pressured on news of possibly more regulatory oversight at the State level (on top of any new Federal constraints). Note Yahoo (YHOO) report after the bell tonight (expected EPS $1.87).

Tuesday’s Market Moving Stories

• GBP had suffered early morning losses following comments from Qatar that it intended to sell shares in Barclays whose share price fell over 5% immediately after the announcement. Ironically Sainsbury’s share price is up a mirror image amount of talk that the same Qatar sovereign wealth fund may buy more shares in the grocery chain at 420p. Sentiment vis-a-vis Sterling has since stabilised following the release of September’s UK public spending data which was better than expected. However, and unsurprisingly, the year to date figures show the largest borrowing requirement in history. GBP may have received some reprieve on these numbers, but the overall dynamics of the fiscal situation look dire.
• Following on from yesterday’s finding by Rightmove that asking prices for London houses had reached all-time record levels, exceeding pre-crunch prices, the FT reports that commercial property enjoyed its strongest monthly increase since June 2006. Again London property was prominent in this recovery and, as with the residential market, a combination of a weak pound fuelling demand from overseas and a lack of supply were key factors. Although I continue to see real impediments to the economic recovery becoming self-sustaining, data-points like this contribute to what will likely be a genuine debate at the November MPC. Globally, there has been increasing comment of late on the challenges posed to policy makers by asset price inflation. However, for the Bank of England, Spencer Dale spoke about this in his June speech suggesting that interest rates were probably not the right tool for responding to potential asset bubbles and that targeted regulatory measures were potentially more appropriate. Yesterday’s announcement from the FSA on restrictions to the mortgage market should perhaps be viewed in that context.
• Britain’s financial regulator plans to force mortgage lenders to check the income of all borrowers, scrapping so-called “liar loans” blamed for helping to fuel bad debt problems at the heart of the credit crunch.
• In September, the US housing market took a major turn to the upside, according to respondents to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. Real estate agent survey respondents reported average residential property prices rose 6% from August to September. But the Moody’s/REAL US Commercial Property Price Indices fell 3% in August from July, bringing the market’s decline to almost 41% since its peak in October 2007, Moody’s Investors Service said in a statement today. Confused? You should be.
• As predicted last week Brazil’s Finance Minister Guido Mantega announced that the government will charge a 2% financial transactions tax on foreign investment flows to Brazil’s stock market and local fixed-income securities. The tax will be charged only once, when the capital enters the country. He stressed that foreign direct investment would continue to flow freely into Brazil, untaxed. He said that “our concern is with excessive speculative investments, short-term capital that could cause a bubble”.
• German producer prices fell 0.5% month-over-month in September, contrary to the consensus forecast for a 0.1% fall. The decrease follows a 0.5% rise in August.
• Three-month LME Copper traded up to, but failed to break through key technical resistance at $6,500. Watch out for data releases and newsflow in the coming days that may provide the necessary stimulus for copper to break though $6,500. 1) Chinese Q3 GDP on Thursday. consensus is for year-over-year growth of 9%. Anything north of this could be the catalyst. 2) September Chinese copper imports on Thursday/Friday. Flash estimates showed an unexpected 23% rise in combined copper imports, confirmation of a rebound in refined imports should be supportive. 3) Ongoing labour negotiations at some of the world’s largest copper mines in South America may lead to more strike action in the coming weeks. 4) Further USD weakness through the key psychological EUR/USD 1.50 level. Indeed as I write, copper and zinc are setting new 2009 highs which will give a fresh kick to miners and basic resource stocks.

Talk Is Cheap
Hot air, fudge and appeasement were all terms that came to mind, reading some of the many pronouncements of politicians or central bankers Monday. Good ideas, fine talk. But we are not much nearer concrete action. We had Chairman Bernanke speaking about the need to correct global imbalances, as if his own back year did not provide enough challenges on that very theme. The dollar remains at risk without a change in policy, yet we had President Trichet chiming that "we all note with considerable attention the statements made by American authorities as regards their support in favor of a strong dollar."

Ben Bernanke again stressed the importance for a "fiscal exit strategy." But what if the government does not want to play ball? What does a central banker do then? The difficult choices are a threat in time to the Fed’s credibility. But that is more a story for late 2010 if no change in policies. Not even the IMF believes in an early fiscal exit, with Lipsky noting that “our forecasts of a return to even relatively sluggish output growth next year in the global economy are predicated on the implementation of the large scale stimulus measures that have already be promised for next year." President Trichet can say that “for us it is extremely important that the Stability and Growth Pact will be respected,” apparently with a straight face, when all the evidence is to the contrary.

One newswire was titled, “Eurozone Issues Stark Deficit Warning to Greece,” but a warning implies that there will be some kind of punitive action. None now, no more so than in the past. Commissioner Almunia only went as far as noting that “I am also seriously concerned about significant, new statistical discrepancies.”

Meanwhile Eurogroup Chairman Juncker chimed on Greece: “The game is over — we need serious statistics.” Wrong. The European Commission has bent over backwards over the past year to accommodate laxist budgets and approve generous support for banks throughout the European Union. This has favored the protection of national champions and hurt the long term interests of the taxpayer. There is no sign that any of this talk will change, and more importantly, that we will see more rigorous fiscal policies. At the same time, the market seems to have no stomach for testing the credibility of unreal policies. There is plenty of appetite for risk, and still oodles of liquidity.

U, V, W Revisited
As the V-shaped reflation tarde is now become the consensus conventional wisdom it is worth pausing to ponder another possible less rose tinted scenario or the W-shaped or VW-shaped recession. The reasons to be fearful are:

1. The nascent recovery in housing fails to hold and prices decline another 20%, putting more than 50% of all mortgages into negative equity. The story is too much supply (note the shadow supply pipeline from foreclosures), lack of financing, the end of tax credits for first-time buyers, too much debt, not enough income and prices that are not yet that cheap.
2. The US unemployment rate does not peak at 10.1% but accelerates towards 12%.
3. Savings rates zoom toward 10% – they are typically a function of wealth and financing costs.
4. The empirical version of the Taylor rule says Fed policy is much too tight. Yes, you read that right.
5. Core inflation heads towards zero, sparking fears of deflation where policymakers are powerless to help. The output gap proxy – capacity utilization minus the unemployment rate – has never been this huge. It increases the deflation risk.

So what are the catalysts or signs to watch for? Try a sub-48 read on the Manufacturing or Services ISM, the four-week moving average of US weekly jobless claims surging 30k, the failures of mid-size US banks, Asian central banks tightening rates, the Fed or ECB bringing forward the exit strategy, US government hiking taxes, a plunge in core inflation or an Iranian crisis.

Equity News

• Xstrata (XSRAF.PK) has put out an interim management statement and production report in which they state that Q3 “operating and financial performance continues to be strong and the company’s financial position remains robust report.” They report higher production of coal, PGMs, refined nickel, zinc in concentrate and lead metal versus Q3 2008, and an improvement in capacity utilization in ferrochrome from 60% in early July to 85% for Q3 in response to growing demand.
• Morgan Stanley (MS) is selling its retail asset management arm Van Kampen to Invesco (IVZ) for $1.5 billion ($500 million cash and $1 billion stock). MS will retain 9.4% minority interest in the combined firm. The rationale for MS is to stick to institutional clients and follow Barclays and Bank of America (BAC) in offloading so-called non-core asset management units to bump up capital and allow focus on core businesses. Doesn’t seem to be selling the crown jewels and although not necessarily needed, is an extra bit of capital. MS Q3 numbers are tomorrow.
• In their nine month interim management statement Pearson (PSO) raised their full year guidance for full year earnings to at or above 60p per share from at or above the 2008 level of 57.7p a share. The FT Group and Penguin are performing in line with expectations but the Education business is performing ahead of expectations despite the challenging conditions existing in the US School Publishing business. Pearson indicated that its Educational business was benefitting from increasing market share in the US as well as benefitting from growth in emerging markets in Latin America, Southern Africa and the Gulf region.
• Adecco (AHEXF.PK) announced that it is acquiring US professional staffing group MPS for an Enterprise Value of €782 million. The acquisition is consistent with the Company’s ambition to expand its professional services presence. Simultaneously, Adecco have announced the launch of a three year €96 million mandatory convertible bond which will provide around 75% of the funding (prospective interest rate of 5.5% to 6.5%). Finally, ahead of the Q3 update on November 5th, the statement indicated that market conditions improved over the course of the quarter, albeit the first half performance was dire (due to the sector).
• There was some respite for the two largest Irish financials Bank of Ireland and AIB after Nomura raised the former to a “buy” and reiterated their “buy” recommendation on the latter.

And Finally… The Entire Financial Crisis In Seven Minutes

Disclosures: None

Comments

[Mayascribe:]

Mole: Another fine piece! Clueless as to why more people don't read your from across the pond summaries.

You may find the below article on Florida housing intriguing.

www.miamiherald.com/bu...

Oct 20 03:10 PM

[manya05:]

I read the Mole everyday - and I am on both sides of the Pond - and you wonder how is that possible :-)

The problem is that his columns and takes are so good, that it is hard to comment on them.

Oct 21 12:03 PM