Report From Europe: Profit Taking Hits European Stocks

 |  Includes: DIA, QQQ, SPY
by: The Mole

U.S. stocks rallied hard Monday, sending the S&P 500 to the highest close in 10 weeks, after better than estimated earnings at companies from Humana (NYSE:HUM) to Allergan (NYSE:AGN). US manufacturing data that topped forecast and speculation that the Federal Reserve may be about to embark on more QE. Alcoa (NYSE:AA) rose 4.8%, to help lead gains in commodity shares. Oil climbed above $81 for the first time since May, giving a boost to energy companies. Humana, the biggest provider of U.S.backed health benefits, and Allergan, the maker of the Botox wrinkle smoother, rallied at least 3.6% while Intel (NASDAQ:INTC) gained 2.7% as a trade group said global chip sales were “robust.”

A Recap of Monday's action: Eurostoxx: +2.92% FTSE: +2.65% DAX: +2.34% CAC: +2.99%. So yesterday was an incredibly strong day. Is this what the rest of August is going to look like? Volumes were hardly through the roof but neither was it dead as a door nail, which would have been more normal for a summer Monday. Standouts were French bank BNP (OTCQX:BNPQY) (+5.3%) on generally better numbers, Air Liquide (+3.4%) which printed ahead of expectations, ‘s (+0.66%) were results were solid, while Linde’s (+3.7%) were strong, Metro (-2.3%) inline,and TNT (-3.6%) announced the long awaited break up of their Mail & Express divisions. After the HK close, HSBC (HBC) (+5.2%) also reported stronger than expected numbers which took the rest of the UK banking sector with it. There was also a bit of excitement in the Autos space as headlines hit the tape that there may or may not be a placing of VW (OTCPK:VLKAF) shares by the state of Lower Saxony. A minister confirmed that there was a planned sale.

This morning in Europe stocks fell from a three month high, as declines by media companies offset better than estimated results at BMW (BAMXY.PK) and U.S. futures slipped. ITV Plc dropped 3% and Sky Deutschland sank 21% after the company announced a capital raising and predicted a full year loss.

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Today’s market Moving Stories

  • Luxury-home prices in central London declined in July for the first time in 16 months as the recovery persuaded more owners to sell, broker Knight Frank LLP said. Prices of properties costing at least 1 million pounds fell 0.5% from June, the London based real estate adviser said in an e-mailed report today. They rose 17% from a year earlier, the smallest gain since February.
  • The Nikkei reports that Japanese manufacturers that draw a large proportion of their revenue from overseas markets are revising their assumed foreign exchanges rates. The new rates generally fall in the range of 85-90 JPY against the USD and 110-115 JPY against the EUR. The paper comments ‘going forward, Japanese companies are more worried about the USD than the EUR.
  • The Wall St Journal featured an article saying that the Fed would consider whether to use cash from maturing mortgage bond holdings to buy new mortgage or treasury bonds at the next FOMC meeting. The news has prompted fresh talk about FED and QE2 (quantitative easing part 2) but so far no firm news out but a weak NFP (non-farm payroll report this Friday ) will for sure start the speculation once again. What can the Fed do? Well, they could buy more treasuries. Yes that will send 10y rates down toward 2.25-2.50% and drag mortgage rates lower. Buy more mortgage bonds? Yes, maybe allowing more households to remortgage at a lower coupon. Lower rates In theory FED can lower rates to zero from the current 0-25bp band but it won’t make a huge difference risky assets will benefit from QE2 with stock market rallying and that will (at least short term) help sentiment among consumers.

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Company/Equity News

  • Wheat prices are at a 22-month high and futures have surged 37% in just a month as the worst heat wave in 130 years hits Russian grain. Wheat output may drop almost 20% from Russia if the drought is sustained, leading to further supply driven price inflation. A sharp rise in wheat prices will cause input pressures on companies such as Aryzta and Kerry as their bread, confectionary and ingredient businesses buy in flour and grains. On the plus side rising wheat prices should support further growth in Irish and UK grain farm incomes, and animal fed ingredient prices will rise too. That should be helpful to Origin and will more than offset any concerns about reduced output at its Ukrainian farms.
  • Media reports in Poland are now suggesting Banco Santander (STD) as the front runner in the bidding process for AIB’s (AIB) 70.5% stake in Bank Zachodni WBK. The reports also suggest that Banco Santander has offered to buy either AIB’s US-based bank M&T or its UK assets. According to earlier reports the other banks involved in the bidding for Bank Zachodni include PKO Bank Polski, BNP Paribas and Italy’s Intesa Sanpaolo.
  • UK homebuilder Taylor Wimpey today produced a strong set of H1 results with revenues of £1.22bn ahead of expectations of £1.13bn. The strong revenue growth allied to significant margin improvement (7.5% in the UK, 7.6% in the US) helped produced a £79.3m operating profit. The margins are boosted by both cheaper land costs and a 9% fall in private build costs from the peak. A strong order book is also reported of £982m in the UK and a further £668m in the US which equates to 86% of UK 2010 targets and 80% of US 2010 targets. In the UK business 4,804 houses were completed in H1 broadly inline with H1 2009 however average selling prices are 9.8% ahead. 29,000 plots have been identified for rezoning in addition to 3,841 plots purchased during the period giving a strong land bank of 6 years. However the group remain cautious on the short term outlook citing concerns surrounding planning legislation in the UK along with weak mortgage availability. However in the longer term a large imbalance between demand and supply is envisaged as mortgage availability increases. In the US signs of a sustainable recovery are also being seen.
  • Completing a strong reporting season from the German automotive manufacturers, BMW reported a significant beat on consensus of EBIT of €1.7Bn (vs. €1.0bn), a strong increase on the weak €69M of the prior period. BMW affirmed its recently disclosed 5% operating margin target for the full year, which looks relatively unchallenging in the context of the 6.6% achieved in H1. Balance sheet disclosure remains a frustration and weak compared to peers. Having adjusted the Group’s balance sheet disclosure for the finance activity I think BMW retains a net cash/debt neutral position in its industrial operations. BMW’s profile therefore looks to be stabilizing and prefer Daimler (DCX) and VW.
  • ITV’s H1 results were, as expected, a strong rebound from last year’s weak performance. Overall, the cyclical rebound in advertising revenue added GBP 113M to first half revenue producing a sharp improvement in Broadcasting an Online EBITA (up from GBP 6M to GBP 122M) as this revenue flows almost entirely through to operating profits. In contrast ITV Studios revenue fell 25% but profitability increased sharply due to cost cuts and total contribution increased slightly. In the absence of a dividend, ITV used this improved cashflow to reduce debt sharply. Net debt fell to GBP 437M from GBP 612M and year end leverage is now likely to be under 1.5 x unadjusted.
  • M&S (OTCQX:MAKSY) has announced the appointment of Alan Stewart as its new CFO to replace Ian Dyson, who is moving to Punch Taverns. Stewart is currently CFO at aircraft leasing company AWAS, and was previously Group Finance Director at retailer WH Smith.
  • Hewlett-Packard (NYSE:HPQ), the world’s largest maker of personal computers and printers, agreed in principle to settle a U.S. probe of false billings, a deal that will trim earnings by 2 cents a share in the third quarter. The agreement would resolve a Justice Department investigation of whether the company overcharged taxpayers through a General Services Administration contract,.
  • Google’s (NASDAQ:GOOG) Android software outsold Apple Inc.’s (NASDAQ:AAPL) mobile operating system for the first time last quarter among new U.S. smartphone users, according to Nielsen Co. Android had 27% of the U.S. market in the second quarter, compared with 23% for the Apple iPhone OS, known as iOS, Nielsen said on its website today. Research In Motion (RIMM) clung to its leading position, with 33% share. Manufacturers such as Motorola Inc. (MOT) and HTC Corp. used Android in a wider range of handsets, giving new smartphone purchasers more options. Still, the iPhone retained a higher share than Android among existing smartphone users, according to Nielsen’s research.
  • BP’s (NYSE:BP) Macondo well released 4.1 million barrels of oil in the waters of the Gulf of Mexico before it was capped, a team of scientists said today. An additional 800,000 barrels that flowed from the well after it started leaking were captured by BP, the U.S. government-appointed group said in its most specific estimate yet of the magnitude of the worst oil spill in U.S. history. At 4.1 million barrels, the spill would be about 16 times the amount leaked by the Exxon Valdez, which released an estimated 257,000 barrels in a 1989 accident. The well was gushing about 62,000 barrels a day when it started leaking and about 53,000 barrels when it was capped on July 15, according to an e-mailed statement from the U.S. government’s joint information centre. The estimate, made using pressure readings and oil reservoir modelling, is an update from the group’s earlier range of 35,000 to 60,000 barrels a day.
  • Anglo-Swiss miner Xstrata (OTC:XSRAF) Tuesday reported a more than threefold rise in first-half net profit and said it remains on track to deliver on its growth and cost reduction targets. The company also declared an interim dividend of 5 cents a share, reflecting its confidence about Xstrata’s future prospects, and said it is on track to deliver a 50% rise in volumes and a 20% reduction in costs via its organic growth pipeline by 2014. Net profit was $2.29 billion for the six months to June 30, compared with $690 million during the same period a year earlier. Net profit in the first half of last year was impacted by a $219 million exceptional charge. Earnings before interest, taxes, depreciation and amortization, or Ebitda, before exceptional items, a keenly watched performance metric, rose 67% to $4.49 billion, slightly below an average forecast of $4.56 billion in a company poll of 11 analysts. Revenue rose 43% to $13.61 billion from $9.54 billion. The FTSE-100 miner benefited from rising prices and increased volumes across many of its commodities.
  • Separately, Xstrata has given the go-ahead for the development of the Las Bambas copper mine in Peru, with production expected from the second quarter of 2014. The mine is tipped to produce 400,000 metric tons a year of copper in concentrate, alongside “significant” quantities of gold, silver and molybdenum, the company said in a statement. Initial project spending would total US$4.2 billion, with construction expected to start in the third quarter of 2011 if regulatory approvals are granted, the company said. Xstrata tips the mine’s life at 18 years.
  • Banco Santander has agreed to a preliminary deal to buy $4.3 billion of U.S. car loans from HSBC Holdings Plc, the Financial Times reported, citing people close to the matter. The Spanish bank is set to announce an acquisition of 318 U.K. branches from Royal Bank of Scotland Group Plc (NYSE:RBS), the newspaper also said. The purchase could be valued at between 1 billion pounds and 1.5 billion pounds and will comprise a premium of more than 100 million pounds in addition to an undisclosed net asset value which may not be determined until the deal closes, the newspaper said.
  • Deutsche Post, Europe’s biggest mail carrier, raised its forecast for 2010 as second-quarter profit jumped 23 percent. Net income rose to 81 million euros from 66 million euros a year earlier, the Bonn-based company said today in a statement. Analysts predicted a profit of 83.8 million euros, according to the average of eight estimates compiled by Bloomberg. Revenue increased 16 percent to €12.8bn. The postal operator, which closed its U.S. domestic express business as part of a profit-recovery drive in 2009, said full- year earnings before interest and taxes, excluding one-time gains and losses, will amount to €1.9bn to €2.1bn. That compares with an earlier forecast “at the upper end” of €1.6bn to €1.9bn. The company, which also owns the DHL express-delivery and logistics brand, “is strategically well positioned and is well prepared for the future,” Chief Executive Officer Frank Appel said in the statement.

And finally

Broken Window Fallacy