Report from Europe: Market Senses the Rally is Overdone

Wednesday will be remembered more for incompetent visually impaired Swedish officials and Messieur “Thieving” Henry than any price action on the markets. For the record, U.S. Stocks fell as profit forecasts dragged tech shares lower. Equities slipped, pulling the S&P 500 down from a 13-month high, as technology companies slid after profit forecasts at Autodesk (ADSK) and Salesforce.com (CRM) trailed some analyst estimates. Autodesk, the biggest maker of engineering-design software, slid 10% after saying job losses in core markets are making the company’s recovery “challenging.” Salesforce.com, the largest seller of Web-based customer-management software, tumbled 3.1%.

The market’s decline was limited as Bank of America (BAC) rallied after John Paulson’s hedge fund said the shares may almost double, while takeover speculation lifted Colgate-Palmolive (CL) and E*Trade Financial (ETFC). The S&P 500 fell 0.1% to 1,109.8. The Dow Jones Industrial Average lost 11.11 points, or 0.1%, to 10,426.31. About three stocks dropped for every two that rose on the NYSE. The dollar weakened and gold climbed to a record $1,153.40 an ounce.

Overnight, the hapless Nikkei won the cellar-dweller award, falling 1.3% to a 4 month low on Japan share-sale plans. Mitsubishi UFJ Financial Group Inc. (MTU) sank 3.1% and Nomura Real Estate Residential slumped 7.8% after failing to sell stock.

Today the tech stocks are leading us down on a Bank of America downgrade (see below) of semiconductor and chips stocks. Feeling the heat are Micron (MU), National Semiconductor (NSM), Intel (INTC), Microchip Technology (MCHP), SanDisk (SNDK) and President Obama’s warning that the US’ spiralling budget deficit and skyrocketing national debt could plunge the country back into recession.

Today’s Market Moving Stories

• The Federal Housing Administration, the agency that insures home purchases made with down payments as small as 3.5%, may create another lending crisis, Toll Brothers Inc. (TOL) Chief Executive Officer Robert Toll said. “Yesterday’s subprime is today’s FHA,” Toll said today at a New York conference for builders sponsored by UBS AG. “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.” Toll Brothers is the largest U.S. luxury homes builder.
• Fed speak was uber-dovish from two of the resident hawks, Plosser and Bullard. The former opining that he was as worried about deflation as inflation, and the latter thinking out loud that the FOMC may stand pat on rates until 2012. Not exactly the kind of comments likely to attract Greenback buying.
• The logic of such a reassurance can be shown in the US housing market, where Housing starts and Permits surprised hugely to the downside in October, questioning the stabilization in the market and allowing risk aversion to nudge higher. One of the reasons put forward for the decline was that the tax credit for first time buyers was due to end this month and construction companies. The signals coming from housing starts underline the uncomfortable reality that a lasting improvement in the US housing market is far from assured .
• Fear of Double Dip in Housing Home Starts Tumble and Mortgage Delinquencies Rise, Casting Cloud Over Recovery
• The Most Important Housing Chart Shows Things Are Still Getting Worse
• For the first time in the credit crisis, the US government may have run into a problem that is too tough to bail out: commercial real estate. Investors shouldn’t expect any meaningful revival of the $700 billion market in bonds backed by commercial real-estate loans, even with the Fed providing leverage to buy such securities. While popular during the bubble, these securitizations lack the sort of attributes, like large pools of loans with similar terms, to generate strong demand in saner times.
• The perilous state of UK public finances was once again highlighted Thursday morning as October public sector borrowing fell by less than expected. Public sector net borrowing totalled £11.4 billion in October, well above the consensus expectation of £7.0 billion.
• French bank Société Générale (SCGLY.PK) has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction. In a report entitled “Worst-case debt scenario,” the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time. SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral.” Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself.
• Oil traded near $80 a barrel in New York after rising Wednesday, as a government report showed U.S. crude and fuel supplies dropped along with refinery production and imports. Oil reached a one-week high of $80.33 Wednesday after the Energy Department said crude inventories declined 887,000 barrels to 336.8 million last week. Stockpiles were forecast to increase 300,000 barrels, according to a Bloomberg News survey of analysts. Fuel supplies fell as refiners operated at the slowest pace in more than a year.
• Steel production in China, the world’s largest maker and consumer, may outpace demand growth this year, spurring exports in the last two months, the China Iron and Steel Association said. Output may rise to a higher-than-expected 565 million metric tons, and demand may gain 18% to 549 million tons, Vice Chairman Luo Bingsheng said today in Beijing. The association on Nov. 3 said production may rise 10% to 550 million tons this year. Luo’s comments underscore growing concerns that rising Chinese supply will depress prices and spur exports that will compete with regional mills including Nippon Steel Corp.

Social Media Madness, Or Absolute Steal?
The price of Facebook Inc. stock on exchanges for private companies has jumped as much as 42% in the past four months as membership of the site topped 300 million users and the company turned cash flow positive. Facebook shares are currently selling for about $21 each at SecondMarket, said Adam Oliveri, managing director at the New York-based company. That’s up from $14.77 in July. SecondMarket and Santa Monica, California-based SharesPost Inc. are among services that allow current and former Facebook employees to sell shares. Facebook, the most-popular social networking site, may sell stock through an initial public offering in the next 12 to 18 months, said Paul Bard, an analyst at Renaissance Capital LLC, which has specialized in IPO research since 1991. More than a whiff of Dot Bomb bubble if you ask me.

Equity News

• German semiconductor maker Infineon Technologies AG (IFX) said it swung to a fourth quarter net profit on growing demand for its logic chips and after the prior-year result was hit by heavy losses at memory chip unit Qimonda. For the current first quarter it expects sales on fourth quarter levels but expects sales to rise at least 10% in fiscal 2010 which ends Sept. 30. Revenue for the period was EUR855 million compared with EUR1.05 billion a year earlier, adjusted for the sale of Infineon’s wireline segment which was announced in July and completed in November.
• Despite Dutch semi conductor maker ASML CFO Still seeing 4Q orders intake at least level with 3Q, the stock fell 4% after Bank of America / Merrill Lynch downgraded the stock to neutral from a buy.
• Intel and Texas Instruments (TXN) were among the 8 microchip firms also cut to ‘Neutral’ at Merrill Lynch as the brokerage downgraded its view on semiconductor stocks. “Barring a sharp upturn in the global economy, our indicators point to the potential for an inventory correction, thus rendering the risk-reward associated with ownership of chip stocks unattractive,” analysts wrote in a report dated yesterday. The NASDAQ is likely to come under pressure this afternoon on this.
• Air France-KLM Group (AKH), Europe’s biggest airline, posted a loss in its second quarter as the recession pummeled passenger traffic, ticket prices and cargo handling. The net loss was 147 million euros, or 50 cents a share, in the three months ended Sept. 30, compared with net income of 27 million euros, or 9 cents, a year earlier, the Paris-based airline said. The median of four estimates compiled by Bloomberg was for a loss of 130 million euros. “We’re in the midst of a crisis that is very, very strong,” Chief Executive Officer Pierre-Henri Gourgeon said at a presentation in Paris. Average fares “continue to be impacted by the recession and the decline in business traffic,” he said. Revenue plunged 19% to 5.6 billion euros in the period.
• Colgate-Palmolive (CL) jumped the most in five months in New York trading after the Telegraph called it an “obvious candidate” for a merger with Reckitt Benckiser Group Plc (RBGPF.PK), citing “well-placed sources.” Colgate, the world’s largest toothpaste-maker, climbed $3.03, or 3.7%, to $85.87 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain since June 1. Reckitt, the world’s biggest maker of household cleaners, closed at 3105 pence today in London. “The latest tale is that Reckitt Benckiser is close to announcing multi-billion pound cross-border transaction,” according to the Telegraph. “Well-placed sources think the most obvious candidate is U.S. giant Colgate-Palmolive.” The U.K. newspaper provided no details.
• The world’s largest yogurt maker, Danone (GDNNY.PK), cut its target for medium-to long-term annual sales growth excluding purchases to at least 5% from the previous forecast of 8% to 10%. The stock is off 4%.
• Blackstone Group LP (BX) is to buy Birds Eye Foods, the largest U.S. frozen food company, for $1.3 billion through its Pinnacle Brands Corp. unit, the Wall Street Journal reported, citing people familiar with the matter.
• SABMiller Plc (SBMRY.PK), the world’s second- largest brewer, reported a 32% drop in first-half profit amid “some of the toughest economic conditions seen for decades.” Net income dropped to $973 million in the six months through September from $1.42 billion a year earlier, the London- based company said today. The prior-year earnings included a $437 million gain from combining a stake in its U.S. Miller business with Molson Coors Brewing Co. assets.
• Volkswagen AG (VLKAF.PK) may disappear from Germany’s DAX Index as Qatar exercises options on the carmaker’s common and preferred stock and HeidelbergCement AG’s share sale boosted its chances for a place in the benchmark gauge, analysts at UniCredit Markets and Investment Banking and DZ Bank AG said. “VW common shares will have to leave the DAX some time in December, probably mid-December, as the free float will fall below 10%,” Christian Stocker, senior index strategist at UniCredit in Munich, said by phone yesterday.
• Marks and Spencer (MAKSY.PK) surprised the market by announcing that it has recruited Morrisons’ (MRWSY.PK) Marc Bolland to be its new CEO. Bolland has done an excellent job at Morrison’s albeit cynics might argue that Morrison was already in an upward trajectory by the time Bolland was installed as CEO, having recovered its poise since the 2004 Safeway (SWY) takeover debacle. Nevertheless, we would argue that he is a better choice than any of the internal candidates. A modest positive for Marks and Spencer.
• According to reports this morning the Canadian Imperial Bank of Commerce (BCM) is continuing to monitor AIB (AIB), although it is believed to be more interested in the M&T (MTB) stake than in taking a holding in the overall group. The news follows reports in August that Royal Bank Of Canada (RY) was interested in buying a stake in the group. The current value of the M&T stake is €1.2 billion, which would release €500-€600 million of capital into the group.
• FBD released a strong interim management statement for the period covering the period July 1 to Thursday, with the insurance group stating that barring any exceptional claims events, full year operating earnings will exceed mean broker expectations of 86c in the current year. Both the underwriting and non underwriting business is expected to produce an operating profit in 2009. The stock trades on just 6.4X bottom of the cycle, cheap for an insurance play.

And Finally…

• A sign of the times or a top?

Disclosure: No positions

Comments

[optionsgirl]

tx for the clip of Faber at the end

2009 Nov 19 02:02 PM

[connorport]

I agree that the trading climate is changing but as many companies are inching downwards in their earnings battles, many other are inching upwards by innovating with the times and trimming up costs of doing business that is unnecessary. As the market has slight recoveries you can get a glimpse of the companies bringing the right stuff. While some companies will lose investors other more nimble companies will be there to scoop them up. We are not seeing a decline as much as we are seeing a shift in investors attitudes.

2009 Nov 19 06:03 PM

[Mad Hedge Fund Trader]

atu If I’ve told you once, I’ve told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It’s a win, win, win, lose pennies trade. I know that the pros that have done for a long time put these trades on without even thinking about it. It’s all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.

2009 Nov 19 11:19 PM