US stocks rose Tuesday, sending the Standard & Poor’s 500 Index to its biggest gain in two weeks, following higher-than-estimated earnings and BHP Billiton’s (NYSE:BHP) massive $39 billion bid for Potash of Saskatchewan (NYSE:POT) bellwether stocks. Wal-Mart Stores (NYSE:WMT) climbed 1.2% and Home Depot (NYSE:HD) jumped 3.4% as both retailers raised their full-year earnings forecasts. Potash led a rally in fertilizer shares, surging 28%, after rejecting the unsolicited takeover offer from BHP saying (according to the WSJ) BHP has to offer a “Big Boy” price, but the news led all of the fertiliser related names in Europe up with Yara +5.9%, K&S +5.7%. Johnson & Johnson (NYSE:JNJ) gained 2.1% on news Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) increased its stake in the company.
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Datawise yesterday industrial production numbers were strong (manufacturing leads the recovery) though wholesale inflation aka PPI was worse with core inflation a concern and Housing Starts posted a small 1.7% rebound in July post the 21% plunge in May and June.
Euopean bourses have opened on the backfoot today. Notable movers include BHP which is weaker on the news of the mega bid for Potash and wind turbine maker Vestash is down a full 16% after the company cut its annual sales forecast to €6 billion from €7 billion and reported its second straight quarterly loss as a lack of financing caused customers to delay or cancel renewable-energy projects.
Today’s Market Moving Stories
- The Federal Reserve’s August 10 policy statement may have led investors to inaccurately believe the US economy is in worse shape than presumed, said Narayana Kocherlakota, the central bank’s newest policy maker, who added that a “modest” recovery appears to be under way. The Federal Open Market Committee’s move to reinvest proceeds from mortgage-backed securities into Treasuries “had a larger impact on financial markets than I would have anticipated,” he said in a speech Tuesday in Marquette, Michigan. “My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted.” The remarks by Kocherlakota, head of the Minneapolis Fed, are among the first by a policy maker since the FOMC’s decision last week to maintain its holdings of securities and prevent money from being drained out of the financial system. The Fed bought $2.551 billion of Treasuries today in the first outright purchase of US government debt since October.
- Germany may have become too competitive for its own good. With exports driving the fastest economic growth since reunification, consumers are failing to respond in kind as companies from Siemens AG (SI) to Daimler AG hold fast to the wage restraint that’s given them an international edge. The result: Europe’s largest economy, four times more reliant on exports than the U.S., is firing on only one cylinder. That’s unlikely to change as Germany spearheads a push for European fiscal prudence and ignores calls from investors and the Obama administration to do more to help rebalance the global economy by reviving domestic demand. “Germany has got to work on its domestic demand,” said Andrew Bosomworth, Munich-based head of portfolio management at Pimco, which oversees the world’s largest mutual fund. “Not everybody can export. Somebody has to import.” French Finance Minister Christine Lagarde, the U.S. Treasury and billionaire George Soros have already urged Germany to do more to smooth out trade flows they say are still too lopsided and pose an obstacle to a global recovery. Foreign sales accounted for 41 percent of German gross domestic product in 2009, compared with 13 percent in Japan and 11 percent in the US. The International Monetary Fund says Germany will have a current account surplus of 5.5 percent of GDP this year. China’s surplus will be 6.2 percent. The US current account, the broadest measure of trade because it includes investment income, will have a shortfall worth 3.3 percent of GDP, the IMF says. “Anybody who believes China is a problem has to believe Germany is a problem,” Nobel Prize-winning economist Joseph Stiglitz said in an interview in Sydney on Aug. 5. Germany should consider more stimulus measures to encourage spending and investment at home, he said.
- The UK’s Chancellor of the Exchequer George Osborne said cutting spending to keep interest rates low was the best way to keep the British economy growing, preparing the ground for the tightest budget squeeze since WorldWar II. “People talk a lot about fiscal stimulus,” Osborne said in an interview in London on Bloomberg Television’s “In Business” program yesterday. “We shouldn’t forget about monetary stimulus. Market interest rates have fallen a long way, and that has an effect on the UK economy.” Prime Minister David Cameron’s Conservative-led coalition government is preparing to announce a program of cuts on Oct 20 that will see the budgets of most departments slashed by a quarter. With schools already protesting about the cancellation of building programs, ministers are trying to pin the blame on Gordon Brown’s Labour administration, which lost power in May. Former Labour Chancellor Alistair Darling has warned that Osborne’s plan to accelerate the pace of deficit reduction runs the risk of derailing the recovery. Osborne said earlier yesterday that “deficit deniers” who opposed his cuts would put Britain “on the road to ruin.”
Geopolitics. Worth a read Debka
Company / Equity News
- The collapse of Kiss, Sun4U and Goldtrails in the UK highlights the impact of ash and competition on the airline charter market. It also shows how Darwinism continues to course through the air travel market with the fittest getting strongest. easyJet and Ryanair will both exploit these collapses and it also raises opportunities in Greece and Turkey where both LCCs are underrepresented.
- UK and US audit regulators are proposing that lease debt is reported on company balance sheets from 2011. Airlines will see dramatic changes if that happens but analysts and investors have used adjusted EV (which captures lease debt) for years so share price reactions will not be material. We estimate bringing lease debt on to the accounts will shift Aer Lingus net cash of about €330m to net “debt” of €33m, Ryanair (NASDAQ:RYAAY) moves from net debt of €120m to €900m and easyJet changes from net debt of €20m to €720m
- Yahoo!’s (NASDAQ:YHOO) search engine gained US market share last month as leader Google (NASDAQ:GOOG) lost ground, according to ComScore. Yahoo, which ranked No. 2, had 17.1 percent of searches, up from 16.7 percent in June, according to Reston, Virginia-based ComScore. Google’s share fell to 65.8 percent from 66.2 percent. Microsoft’s (NASDAQ:MSFT) Bing was unchanged with 11 percent. Yahoo and Microsoft, trying to expand search-based advertising revenue, are teaming up under a 10-year agreement to take on Google. Under the deal, Yahoo plans to use Bing’s search technology on its sites.
- Dow Jones reports that BHP Billiton’s US$38.6 billion bid for Canada’s fertilizer giant Potash underscores increasing corporate interest in farming, food and fertilizer, the executive manager of the Fertilizer Industry Federation of Australia, Nick Drew, said Wednesday. There is a global trend of increasing population and increasing wealth in heavily populated countries like India and China and that means demand for farm products is going to rise, at the same time as the availability of arable land is being squeezed from urbanization and environmental degradation, he said. “There’s going to be quite a crunch coming and agriculture is probably going to become a much more interesting space in the next few years,” Drew told Dow Jones Newswires. The board of Potash isn’t opposed to a sale but has rejected BHP’s bid as “grossly inadequate,” which suggests the sector will remain in focus until the issue is resolved. News of the takeover comes after Canada’s second-largest fertilizer producer Agrium Inc. Monday announced a conditional A$1.24 billion cash takeover offer for Australian agribusiness AWB Ltd. AWB was already considering a share-based nil-premium merger proposal by Australia’s GrainCorp, which if it proceeds would have created Australia’s biggest grain company and its biggest agribusiness with a market capitalization of almost A$2 billion and annual sales in excess of A$7 billion. Drew said BHP may well be just seeing potash as just another mined commodity and would be deciding on the value of any takeover on that basis.
- Separately Dow Jones reports that the leader of the Australian Greens, Senator Bob Brown, has said that his party will push for a renegotiation of the Labour government’s planned mining tax in order to boost projected revenues from the measure. The Greens are likely to hold a key position in the next parliament if, as opinion polls indicate, they gain the balance of power in the upper house – the Senate – after Saturday’s federal election.
- Stryker (NYSE:SYK), a maker of artificial hips and knees, is in advanced talks to buy Boston Scientific’s (NYSE:BSX) pain-management device unit for about $1.5 billion, said three people with knowledge of the transaction. An agreement for the business, also called the neuromodulation unit, may be announced next week, said the people, who declined to be identified because the talks are private. Stryker would probably pay all cash, and the deal may be valued at $1.4 billion to $1.5 billion, the people said.
- Westfield Group, the world’s largest owner of shopping centers by market value, doesn’t expect a double-dip recession in the US after a recovery in the world’s biggest economy helped drive a return to profit. “From an operating point of view, we’re not planning on a double dip, ”Westfield co-Managing Director Peter Lowy said in a telephone interview today. “The real issue for us is not whether you’ve got 4 percent GDP growth or 3 percent or 2.5 percent, but the fact that we still have growth. Growth in sales from our retailers means we’re in a better position this year than we were last year.” Net income climbed to A$960.9 million in the six months ended June 30, from a loss of A$708 million a year ago, the Sydney-based company said in a statement today. Earnings excluding property revaluations and costs were A$1.03 billion, beating a forecast of A$1.01 billion, according to the median of five analyst estimates compiled by Bloomberg.
- The FT reports that retailers, airlines and ship operators can expect to assume billions of dollars more liabilities on their balance sheets as the result of a radical overhaul of lease accounting proposed by US and international standard setters. The new rules have been drawn up in spite of fierce opposition from multinationals, which worry that the shake-up will make their corporate accounts more volatile and vastly increase their liabilities. Some companies fear they may breach bank loan covenants as a result. Under the rules, the liabilities of many companies would increase as they are forced to move rented assets such as aircraft, ships, shops and even photocopiers on to their balance sheets. On average, the changes will increase a company’s reported debt load by 58 per cent, according to PwC and Erasmus University. Senior accountants say few companies and investors are prepared for the volatility the new rules will bring to corporate reporting. The rare joint proposals from the International Accounting Standards Board and the US Financial Accounting Standards Board have also been criticised for failing to reduce complexity. Veronica Poole, a senior partner at Deloitte, the accountancy firm, believes the financial impact of the proposed standard could go so far as to cause some companies to breach loan covenants. “A lot of companies, particularly in the current turbulent times, are very much on the edge of their covenant compliance,” she said. Lease accounting has been a source of contention for many years. Critics, who include IASB chairman Sir David Tweedie, say it has allowed some companies to understate their financial commitments as their leases are kept off balance sheet.
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