Report from Europe: All Bulled Up Pre Fed Meeting

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 |  Includes: AA, ADDYY, AIBYY, AV, BHI, BURBY, CNW, DLB, HIG, IRE, KATE, MAKSY, NSANY, RNSDF, TWX
by: The Mole

The S&P 500 managed to eek out a 0.2% gain overnight Tuesday, largely thanks to the industrials and basic materials sectors, together with an M&A-driven jump in the transport sector as Warren B. plays Texas Hold’em and goes all in on the future of the US economy. Considering the pressure that the US equity market was under at the open, many investors will see this price action as somewhat encouraging.

Stocks have started on the front foot Wednesday with insurer Hartford Financial (NYSE:HIG) lifting its profit forecast after beating Q3 expectations. Alcoa (NYSE:AA) is also on the rise, and Time Warner (NYSE:TWX) is up on reported EPS of 61c versus Street estimates of 54c

Disappointments came from oilfield services company Baker Hughes (NYSE:BHI) after reporting a Q3 which was down 87% with an EPS 26% below average analysts estimates, trucker Con-Way (NYSE:CNW), courtesy of a 28% miss on Street EPS expectations, Dolby Labs (NYSE:DLB), which was cut to “neutral” from “overweight” at JP Morgan and retailer Liz Claiborne (LIZ), who came in with a loss per share that was 98 worse than the market was braced for.

The Services ISM released at 15.00 came in at an underwhelming 50.6 versus an expected print of 51.5. While I hate to be the harbinger of doom, the employment component therein implies a non-farm payroll reading of -300k on Friday against the current market expectation for a -175k loss. Have a look at the chart below. The correlation is stunning. That said equities don’t seem to care, but caveat emptor.

Today’s Markey Moving Stories

  • Official Gold HoldingsFollowing Tuesday’s announcement that the Reserve Bank of India has bought 200 tonnes of gold from the IMF, the gold price has shot to a new all-time high ($1,094) and looks to have $1,100 comfortably in its sights. Not only has India’s move made it more likely that all of the IMF’s 403-tonne sales program will go directly to central banks rather than via the open market, but it is an indicator that central banks as a group may soon shift from net seller to net buyer for the first time in three decades. Gold’s surge has reinvigorated the other precious metals and has also helped to support the previously under pressure base metals. The table really hammers home the point how underweight the BRICs / Asian / South American central banks are gold vis a viz the rest of the world.
  • Platinum and palladium have gained further support from US light vehicle sales data for November. Sales came in above expectations, rising by 12% month-over-month after October’s post cash-for-clunkers slump. They were flat year-over-year. The likely stabilization of vehicle sales is just one of the reasons why palladium and platinum are my top metal picks.
  • While Obama may not have a full second stimulus plan up his sleeve, it’s looking increasingly likely that the White House is preparing to launch a new jobs program. The first indications as to what could be coming up were from officials reacting to the stimulus suggestions of commerce secretary Locke. Recall that the denial suggested that Locke was getting confused with a host of measures to improve the labour market. Yesterday Peter Orszag, of the Office of management and Budget, warned of the long term implications of a high jobless rate and that the administration was looking at ways to both cut the rate and minimise the negative implications.
  • ECB member and keeper of the hawkish flame, Weber, played down the dangers of the current policy mix by noting that many of its liquidity arrangements can be unwound naturally. He said many of the measures will run out by themselves unless the ECB chooses to extend them. In other words, the ECB doesn’t necessarily need to invoke a deliberate exit strategy.
  • The UK’s Nationwide Building Society reported its consumer confidence measure held at 72 in October, the same as September. That’s the highest since April 2008. The expectations index for jobs and personal finances dropped 2 points to 106, but the present situation index was up 3 points to 22.
  • The headline index of the UK services PMI survey jumped to 56.9 Wednesday, up from 55.3 the previous month. This is its highest level for two years and is well above its long-run average (which since the survey began in 1996 has been 55.2). The detail showed incoming new business rising 1.4 points to 55.4 and outstanding business up almost four points (albeit still below 50). I should exercise caution in interpreting this survey, however; it proved too optimistic relative to official service sector output growth in the third quarter. It remains to be seen whether GDP is revised higher or whether the less upbeat surveys were right.
  • Wednesday data highlight thus far has been the private sector ADP jobs report which came in at -203k (versus expectations of a -198k drop) so pretty much on the money though the previous months number was revised 30k better. Since the adoption of new methodology in December 08, the ADP estimate has undershot the actual key nonfarm payrolls due Friday at 13.30 in eight of the 10 monthly observations including the recent five releases. So if the same pattern holds true there is a possibility for nonfarm payrolls to print above expectation as well (current consensus forecast is for -175K).
  • Fitch has moved Irish sovereign ratings down two notches from AA+ to AA-. Fitch had Ireland on negative outlook so this is no surprise at all. The two notch move means the outlook is now stable. The general point made by Fitch is that the recession and banking crisis has hit Ireland hard and that something needs to be done. The point, recognised by Fitch, is that Ireland is doing something.
  • The World Bank has warned that the vast amounts of cash being provided to the financial system could cause new bubbles to inflate in real-estate and in equity and currency markets, especially in Asia.
  • The WSJ is reporting that the IEA will next week make a substantial downgrade to its long term forecast for global oil demand.

Employment component of services ISM versus Non Farm PayrollsClick to enlarge

What To Expect From The Fed Meeting
While I expect no significant shift in tone in Wednesday’s FOMC meeting, this is the key event risk for the day, especially given market speculation that the Fed might soon tinker with the statement language regarding the likely path of policy rates. While the statement may see several tweaks -- for example, in the description of growth picking up or assessment of the household spending data with more positive data in hand -- I do not anticipate the committee to alter the crucial phrase guaranteeing “exceptionally low levels of the federal funds rate for an anticipated period” as been debated in the market. I remain of the view that it is premature for the FOMC to send out a hawkish signal. But the Fed is now walking a fine line: an early exit could do serious damage to risk assets, and thereby to the economy, while laissez-faire could support the growth of another risk asset bubble. The shift in tone may not come before the March 2010 meeting and if the market disappointment over the Fed’s non-action today leads to fall in US long term yields, it should push JPY upward given the persistently strong negative correlation between the two.

Playing With My Money

Company News

  • GM decided to drop the Magna bid and to hang on to Opel. The reason given was that the billions of subsidies GM had received had made the company financially stronger so that it no longer needed the Magna sale. (So this means that the corporatism that led to the rescue of GM defeated the corporatism that wanted to secure the sale to Magna and its Russian partners.) It now wants to proceed with its own restructuring plan. This is a severe embarrassment to the German government which had spent the last six months clinching the deal.
  • Bank of Ireland’s (NYSE:IRE) first half loss was in line with expectations at €979 million. There was no new news on Nama, still going to put €16 billion loans at probably somewhere near 30% discount but no update on timing. The loan book continues to crater, loan losses 6x Sept 2008 at €1.8 billion, more than the entire revenue line. 64% of the charge is against the property and construction sector (just a thought here, imagine what the Spanish banks’ loan losses would look like if they accounted for bad property loans like the Irish have done). I think you’ll see Bank of Ireland come with another capital raising measure/ restructuring before too long, the ratios look OK, but the tolerance levels are low. Share price wise, the stock recouped all of yesterday’s falls and is up 13%. Chat is that a major reason for the recent price performance (or lack of it) by Bank of Ireland and AIB (AIB) is that hedge funds had been liquidating positions via program trading which can knock a stock down in the blink of any eye (i.e. you hit the bid and then the next bid is 10-15c lower).
  • Marks & Spencer’s (OTCQX:MAKSY) H1 results came in ahead of expectations with profit before tax at £298.3 million roughly flat on last year (but ahead of consensus of £285 million), on sales up 2.8%. The statement indicated that Q3 had started well but that the Company remained cautious on the outlook. The stock is up 5-6%.
  • Next released a positive Q3 trading statement this morning, raising guidance for FY profit and H2 sales. FY profit guidance was raised by £30 million to £472 million, which would represent a 10% increase on last year’s outturn – what recession? Shares are up over 6% today. Debenhams and Burberry (BRBY) are also up 5.7% and 2.5%, respectively, as retailers led the FTSE up.
  • Overnight Nissan (OTCPK:NSANY) narrowed its full year loss estimate after the Tokyo close and this has given euro auto stocks a lift today, with Renault (OTC:RNSDF) being the big winner up 3% (as it has a large stake). Adidas (OTCQX:ADDYY) is also ahead 3% after beating analyst’s estimates. Insurer Aviva (NYSE:AV) is also bid (up 6%) after stating that margins on new life and pensions products have increased.

And Finally… Irate Grandmother Wants Bailout Blood

Disclosures: None