Report From Europe: European Stocks Weaker and Japan Intervenes

Includes: DIA, QQQ, SPY
by: The Mole

Despite the upside surprise in retail sales U.S. stocks fell Tuesday, preventing the longest S&P’s 500 Index winning streak since July. Concern that Bank of America (NYSE:BAC) may have to buy back as much as $20 billion in home loans offset a rally by technology companies. Bank of America shed 2%, dragging banks in the S&P 500 to the biggest decline among 24 industries. BB&T (NYSE:BBT), North Carolina’s second-biggest bank, slumped 4% after saying it will write down more than $1 billion in loans. But Cisco Systems (NASDAQ:CSCO), the largest maker of networking equipment, rose 1% percent after announcing its first dividend, while Hewlett- Packard (NYSE:HPQ) rallied 2.6%. Elsewhere Newmont Mining (NYSE:NEM) gained 4% as gold futures rose to a record $1,276.50 an ounce on safe haven buying

In Europe today Drax led declining shares, falling 3.4% after JP Morgan lowered its recommendation for the British utility to “underweight” from “neutral.” Goldman Sachs also downgraded the shares today to “neutral” from “buy.”

And Nokia (NYSE:NOK) shed 1.4% after Citigroup downgraded the world’s largest mobile-phone maker to “sell” from “hold.” Analysts also reduced their price estimate for the shares 14% to 6.10 euros. “We expect the stock to continue to materially de-rate as the investment community focuses on worsening fundamentals, driven by intensifying competitive dynamics,” Citigroup wrote in a report dated today.

But Next gained 4.3% after the retailer posted a 15%rise in first-half profit before taxes to 213 million pounds ($330.5 million). The company also maintained its profit forecast for the year. It expects full-year earnings per share growth of 13 percent to 18 percent.

French Connection surged 5.6% after the U.K.-based fashion retailer reported a 4.2% rise in half-yearly sales to 96.2 million pounds.

Elsewhere Peugeot (OTCPK:PEUGY) rallied 4.1% in Paris after Morgan Stanley raised its recommendation for the carmaker to “overweight” from “underweight” and lifted its price estimate for the shares by 26% to 34 euros. “We believe the company is the best play on oversold European operating conditions,” analysts wrote in report to clients. “Pricing, volume, inventory and fixed costs are all proving better than expected.”

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Today’s Market Moving Stories

Japanese Intervention

This morning the Japanese government finally flashed the cash and intervened for the first time since March 2004 to weaken its currency. The Nikkei 225 Stock Average jumped 2.7%, the most since July, led by exporters. So after PM Kan survived a leadership vote (against a guy who favoured JPY intervention to help exporters) they finally stop talking and did what they said they would – stop the slide in USD/JPY. The USD/JPY cross (the key to financial markets) hit 82.88 before the intervention and now sits around 85. The big question is “WILL IT WORK?” Short term yes but long term it is very difficult for unilateral intervention to succeed.

The Yen intervention needs to be backed by fundamentals, namely improving U.S. fundamental data in order to have a lasting effect. With a $4 trillion daily currency market, MOF has limited share as a seller of yen, so they can be overwhelmed if fundamentals don’t support the intervention. In 2003-04, intervention had to continue over a period of years to make an impact. Bank of Japan/ World Leaders: BOJ likely to remain on the sidelines and not sterilize. Sterilization is only likely to become a topic if the intervention program becomes massive at 10-30 trillion yen. Global leaders will also likely be quiet as Japan has been basically the only country to suffer from currency strength. Past Experience: MOF has had both success and failures in the past with intervention. When trying to defend the Y100/$ line in 1994 the government failed and the yen eventually went to Y80/$ because of a US policy for a weaker dollar, not unlike what Japan faces now with the current US administration. The 82 line they are hoping to defend this time could break as well should fundamentals continue to deteriorate. Fundamentals Unchanged/ Sentiment Improved: Intervention has little bearing on Sato-san’s fundamental outlook for the Japan economy and the move won’t alleviate deflation. However, market sentiment is likely to shed some of its pessimism as a result of the move.

Regulation On Short Selling

The WSJ reports today that new European Union proposals set to emerge Wednesday are aimed at regulating financial practices that were blamed for intensifying the global financial crisis, including the short selling of securities. The European Commission, the EU’s executive arm, will propose regulations for short selling, the sale of borrowed securities by an investor who hopes to make a profit by buying an equal number of shares at a lower price to replace the borrowed securities. The proposals also cover credit-default swaps and the clearing and greater standardization of over-the-counter derivatives. Officials say the draft legislation would increase the convergence of the EU’s framework of financial regulation with those of the U.S. and Hong Kong. According to European officials and documents reviewed by The Wall Street Journal, the proposed rules would, if adopted, force investors to disclose short positions to regulators if they exceed 0.2% of a company’s issued share capital. They would require disclosure to the rest of the market if the short position exceeds 0.5%.

US Outlook

The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory — the supply of homes in default or foreclosure that may be offered for sale — is preventing prices from bottoming after a 28% plunge from 2006, according to analysts.”

An article from today’s WSJ says that Fed officials are divided on how weak the US economic outlook should get before they look at a second round of QE. Related is a call, covered on the WSJ website yesterday, quoting Goldman Sachs' call for additional QE to the tune of 1 tln USD in the Nov or Dec FOMC meetings. This call was out last week so strange it drove the market yesterday but the combination of better bid equities and US Treasurys and weaker USD implies that it was a QE related move.

Lehman Bros Back

Lehman Brothers is a business again, two years after declaring the biggest bankruptcy in history, with billions of dollars in cash, 500 employees, real estate and investments in other bankruptcies. The defunct New York-based investment bank, being run by Bryan Marsal, has almost $20 billion in cash and a monthly payroll of up to $45 million for managers and advisers. Hard-to-sell investments are being managed by 400 employees, and the firm is spending tens of millions of dollars on litigation set to stretch to at least 2012. I wonder if we will be able to say the same about Anglo Irish in 2 years?

Company / Equity News

  • Cisco Systems (CSCO) will institute its first dividend during its current fiscal year, CEO John Chambers said Tuesday, with a yield likely between 1% and 2% as the networking giant begins to return its hefty cash holdings to shareholders. Chambers–who has said it was a matter of when, not if, Cisco would begin paying a dividend–made the disclosure Tuesday during a presentation with analysts. Cisco shares are up 3.4%.
  • Google (NASDAQ:GOOG), stepping up competition with Facebook, will add a layer of social networking features to its main products, Chief Executive Officer Eric Schmidt said. The changes will come in the fall of this year, Schmidt said today at a press briefing in Arizona. He declined to elaborate. The remarks followed comments by a Facebook executive that Google was building a new social-networking site.
  • Microsoft (NASDAQ:MSFT) is releasing a new version of its Internet Explorer browser today, aiming to stem market share lost to Firefox, Google’s Chrome and Apple’s Safari. Microsoft, based in Redmond, Washington, will mark the public release of a test version of Internet Explorer 9 at an event in San Francisco. The software offers support for HTML 5 technology and loads pages faster.
  • Next reported a solid set of first half results this morning, while confirming that the outlook for the economy is ‘sluggish’ and that it sees very little growth in consumer spending. However, the company points out that it does not anticipate a double dip recession. Net profit of £155m was in line with expectations.
  • According to the FT, Tesco (NASDAQ:TESO) has made it through to the second round of bidding for Carrefour’s (CRERY.PK) assets in Thailand, Malaysia and Singapore, despite being one of the lower bidders.

And finally one for Brian … The Lakes Of Ponchartrain

Disclosure: None