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U.S. stocks climbed Monday, with the Standard & Poor’s 500 Index reaching its highest level in more than two months, amid speculation the Federal Reserve may announce more measures to help kick start economic growth this evening. McDonald’s (NYSE:MCD) rose 1.6% after beating sales estimates, while eBay (NASDAQ:EBAY) gained 2.5% after former unit Skype filed for an initial public offering. US Homebuilders rose after Deutsche Bank said the housing market decline is almost over. But Hewlett-Packard (NYSE:HPQ) plunged 8% after CEO Mark Hurd resigned. Elsewhere Target Corp. (NYSE:TGT) advanced 2%t after Barron’s said the retailer’s focus on higher margin goods may boost earnings.

This morning in Europe stocks are on the defensive with basic materials and miners under pressure on the latest signs of a slowing Chinese economy (see below) while home builders (Taylor Wimpey, Barrett Developments) are offered in London on the latest disappointing data from the RICS survey. Other stocks catching the eye include TUI, Europe’s biggest tour operator, which is off 8.5% today after the company said it expects its full year result to be at the lower end of forecasts after posting a loss for the first nine months of the year of £409mn, and Hanover Re, Germany’s second largest reinsurer, is down 2.5% as it said second quarter net income fell to €159.6mn from €208.7mn a year earlier. The median estimate of seven analysts surveyed by Bloomberg was for profit of €154mn.

Today’s Market Moving Stories

  • All eyes on the Fed again today as Bloomberg reports that the US Federal Reserve policy makers meeting today may find the market reaction to any announcement of steps to spur growth will be bigger than the impact on the economy. Options outlined last month by Fed Chairman Ben S. Bernanke include providing more information about the Fed’s pledge to maintain record low interest rates, reducing the rate it pays on banks’ reserve deposits and sustaining or expanding the size of the balance sheet. “If they’re small scale, the direct effects are relatively small,” said Marvin Goodfriend, a former research director at the Richmond Fed. “But to the extent that they signal the Fed’s concerns and what direction they are, and the Fed’s willingness to take actions given the signal of their concerns, they could have big effects.” Investors would see new Fed efforts as foreshadowing more dramatic steps to come, including large scale asset purchases, said Goodfriend, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. Weaker job gains at U.S. companies since April and a slowdown in growth last quarter are among signs the recovery is stalling, increasing pressure for more Fed easing.
  • In a different take on the same story AP report the Federal Reserve policymakers are pondering ways to jump start the economic recovery. The trick: making sure whatever they do or say doesn’t rattle Wall Street. U.S. stocks closed higher Monday as investors anticipated reassuring words or action Tuesday by Fed Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee. Asian shares were mixed in early trade Tuesday. “There was some anticipation the Fed could announce additional liquidity measures like the purchase of bonds,” Craig Peckham, market strategist at Jefferies & Co. “It’s a little premature for the Fed to expand. We don’t think they’ll be any meaningful change in policy.” A disappointing jobs report on Friday intensified pressure on Fed policymakers to consider new action aimed at stimulating economic growth. That report showed the unemployment rate stuck at 9.5 percent in July and a third straight month of anemic hiring from the private sector. Researchers at the Federal Reserve Bank of San Francisco, in a paper Monday, said there’s a “significant” chance the economy will tip back into recession in the next two years. However, such a backslide is unlikely to happen in the next few months, the researchers said. Economists say Fed officials have a handful of options at their disposal to help prevent that from happening, but would likely consider from two options: — Clarify that the Fed will keep short-term interest rates at record lows for as long as it takes to encourage more use of credit. — Use the proceeds from the Fed’s investments in mortgage securities to buy government debt on a small scale. That could help drive down long-term interest rates. Both steps would signal to markets that money could be borrowed cheaply for a longer period of time, giving businesses and individuals more confidence to finance major purchases. Still, economists doubt how much impact they would have. Interest rates are already at historic lows and that hasn’t generated more buying activity.
  • U.K. house prices fell for the first time in a year in July as the number of new properties for sale outpaced demand again, the Royal Institution of Chartered Surveyors said Tuesday. The outlook for the next three months suggests prices will remain soft, although actual sales are expected to rise as lower prices encourage activity.
  • U.K. government budget cuts will push more companies into bankruptcy in the second half of this year as departments from education to transport delay or cancel contracts, insolvency practitioners predicted on Aug. 6. Industry trade body R3 said its members were forecasting corporate insolvencies will rise as much as 20% in the second half, compared with the first six months, when there were fewer than anticipated. Prime Minister David Cameron’s coalition government has pledged to reduce the U.K.’s record budget deficit by slashing spending, with most departments facing cuts of a third, the independent Institute for Fiscal Studies says.
  • The British Retail Consortium’s index survey of retail sales shows a rise of 0.5% yoy on a like for like basis, less than half the 1.2% growth recorded in June. “The overriding factor is consumer confidence it’s fallen recently.
  • In China’s property prices rose at the slowest pace in six months in July as the government cracked down on speculation to prevent asset bubbles. Prices in 70 major cities climbed 10.3% from a year earlier, the statistics bureau’s newspaper, China Information News, reported today. The value of sales fell 19.3% from a year earlier. China’s banking regulator has ordered stress tests for lenders to gauge the impact of home prices falling as much as 60% in the hardest hit markets, a person with knowledge of the matter said last week.
  • Chinese Exports rose 38.1% yoy in July down from 43.9% in June but above the consensus forecast for a rise of 35.5%. Imports rose 22.7% yoy, down from 34.1%, to yield a trade surplus of $28.7bn an 18-month high, well above the consensus forecast of $19bn and above June’s surplus of $20bn.
  • Overnight in Japan, the Bank of Japan has kept interest rates at 0.1% in a unanimous vote. It also kept its economic assessment unchanged and said that the bank needed to watch how fiscal problems in some European countries could affect the Japanese and global economies.
  • Australian business confidence slipped in July to the lowest level in more than a year, adding to signs higher interest rates are eroding domestic demand and driving the local dollar down by the most in almost two weeks. The confidence index halved from June to 2 points.
  • According to Bloomberg, Wall Street banks are creating the “next investment bubble” by selling opaque and unregulated structured notes to investors hunting for yield, according to Christopher Whalen, managing director of Institutional Risk Analytics. Using the same “loophole” that allowed over-the-counter sales of collateralized debt obligations and auction rate securities, firms are pitching illiquid structured notes whose value is partly derived from bets on interest rates, Whalen wrote today in a report. Whalen, who predicted in March 2007 the collapse of the mortgage-backed securities market, said that these structured notes “promise enhanced yields that go well into double digits” and “often come with only minimal disclosure.” “The only trouble is that the firms originating these ersatz securities, as with the case of auction-rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid,”Whalen wrote.

RAM Market At Risk Of Shortage In 2H 2010

DJ reports that the high-flying market for dynamic random access memory chips might run into some turbulence during the second half of the year, researcher iSuppli warned, with supplies possibly falling short of demand due to limited manufacturing availability DRAM chips, used in personal computers, are expected post 49% shipment growth this year, according to analyst Mike Howard, most of it occurring in the second half of the year. Each of the final two quarters are projected to post sequential growth of about 11%. Howard said such gain concentrated in a six-month period will strain the production capabilities of DRAM supplies. Two issues could possibly hurt second-half DRAM availability and push what is left of the year into undersupply. In the first instance, iSuppli said overall production would remain a problem given the inability of ASML Holding NV (NASDAQ:ASML), the world’s largest supplier of semiconductor lithography tools, to supply enough equipment. A second and potentially more serious difficulty that could impact supply relates to yield challenges beyond 50 nanometer, the point at which immersion tooling becomes necessary. ISuppli said production could be disrupted if companies in the midst of transitioning to smaller lithographies run into unforeseen yield issues. As a result, overall bit growth projected for this year could come in from two to four percentage points lower than expected, slashing the projected annualized growth rate to as low as 45%. ISuppli added the loss in bit growth might mean an upward movement in prices. And in such a scenario, the real winners would be companies that have already leapfrogged the immersion hurdle which includes powerhouses like Samsung Electronics Co. (OTC:SSNLF) and Micron Technology Inc. (NASDAQ:MU)

Company / Equity News

  • Bloxhams note that Elan (NYSE:ELN) today announced an update on initiatives being undertaken to bolster the financial strength of the company. Elan expects in the near term to reduce gross debt by 20% to $1.24bn through the buyback of $500m in debt set to mature in November 2011 and November 2013. The debt reduction will also be helped by further inflows from the J&J (NYSE:JNJ) deal. Guidance on the full year was also reiterated with revenues still expected to grow in 2010 and adjusted EBITDA to be more than $150m. Separately Elan today announced that a mid stage trial of ELN005, a drug to combat mild Alzheimer’s, developed in association with Transition Therapeutics didn’t meet goals. The findings are from an 18 month study of 166 patients which failed to show “statistical significance”. Today’s results are a lower dosage of the two trials discontinued in December due to adverse side effects. Despite today’s set back Elan and Transition “intend to advance” the drug into late stage with no timeline set out.
  • Danske Bank releases half year results this morning, containing results for its Irish operations at National Irish Bank. NIB shows impairment charges rising marginally from DKr 2.7bn to DKr 2.8 bn in Ireland. According to the bank, the charges are primarily driven by the “lower value of mortgages on property serving as collateral for exposures with weak credit quality”. Impairment charges equalled 13.3% of total lending compared with 11.8% at the FY 2009 stage and 7.1% of the book was impaired and in default at the H1 stage, compared with 7.4%, in the FY 2009 results. The bank also predicts further falls in house prices while showing a shrinking market share of Irish lending from 4.7% to 4.4%. NIB’s overall results were flat with in loss before tax from €341mn to €342mn.
  • McInerney Holdings is said to be in advanced talks on a recapitalisation deal according to overnight press reports. The deal is understood to be 90% complete with investment said to come from US and British based private equity. Talks are said to be underway since April 2010 and due diligence is already said to be taking place for a number of weeks. McInerney owe €236m with €111m owed to BOI, Anglo Irish and KBC.
  • Bank of America (NYSE:BAC), recently hit by last month’s disclosure of a potential $10bn charge tied to new regulations, may add $13 bn to its book value when it posts gains from a Chinese bank stake for the first time in October. The windfall stems from Bank of America’s 11% stake in China Construction Bank Corp.
  • BP (NYSE:BP) and the U.S. government are close to agreement on using future revenue from the London-based company’s Gulf of Mexico operations to back the $20 billion clean up and compensation fund. The Justice Department yesterday announced the completion of talks to establish the fund and its operation, and discussions are continuing on ways for BP to put in the remaining $17 billion.
  • Germany’s energy utilities are ready to drop their opposition to plans by the government to introduce a tax on nuclear fuel rods under certain circumstances.
  • Intercontinental announced a strong set of H1 results this morning with operating profit rising 25% to $219m (up15% in Q1) on revenues which were up 9% on a constant currency basis. Trading improved steadily as the half progressed RevPAR (Revenue per Average Room), which rose 3.9% in the period and 7.4% in Q2 driven primarily by improvements in occupancy.
  • According to the Daily Mail today a TENTH of Britain’s biggest companies are saddled with final salary pension schemes that dwarf their market value, according to a worrying report. Consultancy firm Pension Capital Strategies will this morning reveal that ten members of the FTSE 100 now have retirement plans greater than the size of the firm. But for British Airways (OTC:BAIRY), BT (NYSE:BT) and engineer Invensys the situation is more unsettling still, with their pensions liabilities now more than twice the market capitalisation of the groups. The study shows that the combined deficit on FTSE 100 retirement plans stood at £3bn at the end of June a £17bn improvement on last year’s level after a bounce on the stock market. The PCS’s report is just the latest to highlight the dire predicament facing some of Britain’s best-known companies as they try to reconcile the rising life expectancy of their workers with increasing turbulence on financial markets. Actuarial firm LCP last week reported that the total deficit on FTSE 100 pension schemes had reached £51bn by the end of 2009.

And finally

Bill Dance Fishing Bloopers

Disclosure: None
Source: Report From Europe: Federal Reserve Looks Set to Act