Report from Europe: Cheaper Money Keeps the Party Going

The S&P 500 shed 1% Thursday, having reversed modest gains made earlier in the session spurred by Hewlett-Packard’s (HPQ) takeover of 3Com (COMS). The IEA raised its forecasts for 2010 demand, but US crude inventories rose more than expected last week. Southwestern Energy (SWN) and Range Resources (RRC) slid more than 4%, helping lead 39 of 40 oil and gas companies in the Standard & Poor’s 500 Index lower as Crude Oil tumbled. Commodities were generally weaker across the board, even with the Baltic Dry Freight Index having returned to levels last exceeded in late June.

There is a lot of chatter Friday about Bernanke’s speech in New York next Monday for the potential for him to make some Dollar supportive comments rather than the usual lip service a la Geithner with his fingers crossed behind his back. Should he do so in more forceful terms that the platitudes we’ve heard of late then there is an expectation that stocks will sell off due to the high correlation between a weak Dollar (as a low interest rate funding currency) and the rise in risk assets.

Walt Disney (DIS), the world’s largest media company, reported fourth-quarter profit up 18%, thumping analysts’ estimates, on higher fees from pay TV operators that carry its ESPN sports programming. The stock is up 4% Friday. But there were some bad omens for retail in the form of Wal-Mart’s (WMT) Q3 profits, which rose by 3.2% but hid negative comment on the outlook for retailing. The company sees “aggressive discounting” leading to heavy pressure on retail prices, and reports that middle-income shoppers remain very much squeezed. Wal-Mart forecast a particularly competitive holiday season as customers continue to worry about finances and rising unemployment. “Our customers continue to tell us they are concerned about their own finances and employment.” Not a good omen for Monday’s Retail Sales (less Autos), with consensus at 0.4% month-on-month.

Stocks Friday are again showing admirable, if misplaced, resilience, in the face of a lousy University of Michigan confidence board reading of 66.0, which significantly trailed expectations of a read of 71.0. Star turns are Abercrombie & Fitch (ANF) which beat Street EPS estimates by almost 50% and is up 6%, Goodyear (GT), up 7.5% after being raised by Goldman Sachs to a “buy”, JC Penny (JCP) up 7% on raising their full year EPS prediction to $1.08 from 90c. To the downside we have Sunoco (SUN) (off 4%) after being cut to “sell” from “neutral” at Goldman Sachs, Blockbuster (BBI) slumping around 10% after reporting a bigger than expected quarterly loss and upscale retailer Nordstrom (JWN) (falling 6%) on upping credit loss provisions and putting out a forecast that disappointed the market.

Today’s Market Moving Stories

• Economists in the latest Wall Street Journal survey, on average, expect the Federal Reserve to raise Interest Rates around September 2010, a politically sensitive time considering midterm elections will be right around the corner and unemployment is forecast to still be over 9.5%. The 52 surveyed economists on average expect the unemployment rate to rise to 10.3% by the end of this year from its current 10.2%, and they expect it to stay above 9.5% through 2010. The economy needs to add about 100,000 jobs a month just to keep up with new entrants to the labour force.
• The better performance of Bonds Thursday was helped by a strong sell-off in oil on a far higher than expected crude stockbuild. There was nothing supportive in the report. Gasoline and distillates stocks built as well (they were expected down). Crude runs remained extremely low while gasoline demand for the 4 weeks to 6 November was reported down year-on-year for the first time in months.
• Staying with the black gold, Saudi Arabia, the world’s biggest oil producer, has started to expand and upgrade its oil and gas production and refining business at a cost of $100 billion to tap rising demand in Asia. Oil Minister Ali al-Naimi said that “China’s and Asia’s demand are projected to be met mainly from supplies from Saudi Arabia and other Gulf states.” Saudi Arabia is doubling its domestic and international oil refining capacity by 2015. He also had comments on global oil price volatility. “While we have been concerned over oil price volatility and the contribution of other non-fundamental factors to such volatility, we have maintained that price extremes in the low and high ends are not sustainable; they are detrimental to oil producers and consumers alike.”
• UK housing-related indicators continue to improve. Mortgage approvals are rising off depressed levels, and the run-rate for housing transactions is now 40% off its low. Given that merchanting activity typically lags these indicators by six months and more, the prospects for the sector in 2010 continue to improve. Moreover, recent corporate evidence from the UK (Grafton, Galiform) has also become noticeably more positive. Travis Perkins is a direct way to play this early-stage recovery story. Moreover, as its performance during the downturn highlights, it is a high-quality, best-in-class margin business with a market-leading position.
• The European Commission, under pressure from Germany, has delayed the adoption of new accounting rules for banks. The International Accounting Standards Board has overhauled the mark-to-market, or fair value rules, to make the system more transparent. Large German and French banks in particular have lobbied hard against the rule change, as it would force them to account for book losses on large holdings of derivatives.
• The outstanding US Public Debt as of Nov. 12, 2009 is $12,000,018,429,405. The estimated population of the United States is 307,272,889, so each citizen’s share of this debt is $39,053.29. The National Debt has continued to increase an average of $3.86 billion per day since September 28, 2007!
• Did you know that Triskaidekaphobia is the fear of Friday 13th?

European GDP Figures
Its “Growth” day in Europe with seven of Europe’s GDP numbers for Q3 being announced. The German figure surprised already to the upside (but we know that was artificially high due to the cash for clunker German equivalent and the huge amount of cash injected by the government into job preservation blah blah blah) It was the French number today that has already surprised at only 0.3% (after the French Industrial ministers guess at 1.0% and despite the fact that my wife was on a spending spree for the last 3 months in France – that probably represented at least 0.1% of the 0.3% figure) The Euro GDP expectation is for an up 0.5% print. If you weight the individual countries numbers France will take this number to 0.4% from 0.5%. The German number makes up 0.2% of that 0.4% and so even though there’s a lot of talk that Europe is out of recession, I’d beg to differ. Germany, with a weighting of a bit less than 30%, is getting a little better with a lot of assistance but the rest of Europe is still in trouble.

The Goldman Prayer
Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

Company News

• BAA has announced that its London airports group will get a £500 million equity injection “to pay down debt, strengthen the group’s medium-term financial ratios and facilitate its access to the capital markets.” £200 million will come from its shareholders and the other £300 million from companies higher up within the BAA group structure.
• A surprisingly good morning for luxury goods makers with news that Richemont (up 4.7%), the maker of Cartier jewelry, said that its first-half net profit on a continued operations basis was €344 million, down 36% year-on-year but topping analyst expectations. Bulgari shares jumped 4.8% after the Italian jewelry firm said that it returned to profit in the third quarter.
• Smurfit Kappa Group (SMFTF.PK) confirmed that it has raised approximately €1.0 billion in its Bond offering announced on November 11th. The initial indication was that the company would raise €500 million of 5-7 year paper, but demand was sufficient to allow a larger amount with a longer duration.

And Finally… $50 For Gold Coin Worth $1100

Disclosures: None

Comments

[doubleguns:]

Mark, I will take all you have at twice the price.

Nov 13 12:28 PM