US stocks slipped Friday, halting the longest streak of weekly gains since April, derailed by US macro economic numbers. In further bad news for freshly nationalized AIB (AIB), M&T Bank (MTB) was again noticeably weak and finished down 10 percent on the week to lead financial companies lower after reports that merger talks with Banco Santander (STD) of Spain had broken down, while Monsanto (MON) tumbled 13 percent on concern its SmartStax corn seeds aren’t performing as well as predicted. A rally in energy shares limited the market’s drop as oil capped its biggest weekly advance since February and EQT Corp. surged after reporting two Pennsylvania natural-gas wells produced “exceptional” results.
Today’s Market Moving Stories
- Today in Europe its been a poor morning for the broad automakers & parts sector preferred shares of Volkswagen (OTCQX:VLKAY), Europe’s largest automaker, slid 3.3 percent, Daimler (DAI), the world’s second- biggest maker of luxury cars, lost 3 percent, BMW (OTCPK:BAMXY) slipped a similar amount ( they had a 350k car recall Friday) and Pirelli, Europe’s third-largest tiremaker, fell 2 percent on news that German new-car sales in September declined 18 percent to 260,000 vehicles, the VDIK industry group said today.
- Gas Natural lost 3.3 percent after saying a ruling related to a gas dispute with Sonatrach may lead to a reduction in 2010 profit of as much as €450 million should its challenges fail. Gas Natural said the decision of the arbitration panel was “abusive” and the company is trying to challenge it.
- Elsewhere Inmarsat has slipped 2.6 percent on news that Harbinger Capital Partners is preparing to sell a third of its stake in the provider of satellite services as it seeks to raise money to invest in other companies, the Sunday Times reported, without saying where it got the information. Harbinger will sell about £300 million of shares, reducing its stake from just under 30 percent to 20 percent, the newspaper said.
- While Yara International (OTCPK:YARIY) posted the largest decline on the Stoxx 600, Monday falling 3.8 percent, as UBS downgraded the largest publicly traded nitrogen-fertilizer maker to “neutral” from “buy.” In a research note they said “Yara has performed strongly since mid-2010 spurred on by stronger expectations for 2011 due to higher crop prices. This has resulted in multiple expansion which we believe will contract once crop prices retrace.”
- To the upside is Wellstream Holdings, which is better by 2.6 percent after the Sunday Times said General Electric Co. (GE) made a bid worth more than 800 million pounds for the oilfield-services provider, citing unidentified people close to the matter. Wellstream has hired Rothschild’s and Credit Suisse as advisers, it said.
- Pumbling materials supplier Wolseley Plc (OTC:WOSCF) has risen 2.2 percent as Credit Suisse rated the shares “outperform” in new coverage.
- And Saab rallied 7.4 percent after receiving an order for an airborne surveillance system worth more than 4.5 billion kronor ($667 million).
- And Premier Foods Plc soared 11 percent after the maker of Hovis bread received expressions of interest in its Quorn brand of meat-free products and related units and may sell them, the company said.
- Stateside, premarket Microsoft (MSFT) is off 2 percent as Goldman Sachs downgraded the stock to “neutral” from “buy.” The brokerage cited Microsoft’s failure to win the same market share in mobile devices that it holds in PCs. “We have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence,” San Francisco-based analyst Sarah Friar wrote in a report dated yesterday.
- And Sanofi (SNY) has gone hostile in its bid for Genzyme and started a tender offer to acquire all the outstanding shares of Genzyme for $69 each, the Paris-based company said in a statement today. The offer expires at 11:59 p.m. in New York on Dec. 10.
- Many British banks may need another state bailout next year and their borrowing requirements could hit 25 billion pounds ($39.4 billion) a month according to the New Economics Foundation (NEF) think-tank. NEF supports separating retail and investment banking. UK banks have a January 2012 deadline to repay GBP185bln they borrowed from the BOE against GBP287bn of illiquid assets, mostly residential mortgage backed securities, under the BoE’s Special Liquidity Scheme.
- Chinese Premier Wen and Greek PM issue joint statement: should be an obvious euro positive Wen is in Europe on a tour of EU countries with the worst debt positions (last point probably not a coincidence). Currently in Greece. Will visit Belgium, Italy (and Turkey) this week (perhaps a visit to Ireland would also be appropriate?). Wen said China would support the euro by not selling holdings of Eurozone sovereign bonds. Said China already holds Greek bonds, and he even pledged to buy more Greek paper as soon as Greece returns to capital markets. Surprisingly there was no reaction to these remarks at the Asia open today. Perhaps some reaction soon as Greek bond markets open (of course, he did not commit to buy Greek paper immediately in the secondary market so the effect may be muted…still though, China’s reserves are worth $2.5trn, 7 times the entire Greek national debt so support from China, if it materialises, would mean default risk disappears)
- Currency co-ordination: The FT reports that France and China have been in talks for the past year over whether there should be heightened co-ordination of exchange rates to promote stability of the international monetary system in the wake of the financial crisis. The paper reports that the talks and their content have been kept secret in an attempt to draw China into a discussion on global currency co-ordination. It adds that Mr Sarkozy is hoping to win Chinese support for a common approach during discussions with Hu Jintao in November, when the Chinese president visits Paris. It quotes “people familiar with the matter” as saying that France wants to open the debate during the G20, rather than push a particular view, and is not proposing fixing rates. The paper also reports that Mr Sarkozy is planning to discuss currency co-ordination with Mr Obama when he next visits Washington. Germany too will be approached, and the subject may be raised when Mr Sarkozy meets Angela Merkel, German chancellor, in Deauville this month.
- Reuters quotes a French presidential palace source as saying: “There have been no secret negotiations on exchange rates with any of our G20 partners, not the Chinese or any other partner.” The source adds: “The information published in the FT is “without foundation.” A second source says: “France has of course started the consultation process with major partners on the topics that will be central to its presidency, including the reform of the monetary system, so that we gather everybody’s views.”
- Canadian Finance Minister Jim Flaherty says (regarding the informal G7 finance ministers meeting in Washington on October 8th): “We’re certainly going to review … economic growth issues. There will no doubt be discussion about some of the world currencies, particularly Asian currencies, that are relatively inflexible.” He also says that there will no final communiqué.
- Japan: Chief Cabinet Secretary Yoshito Sengoku tells Reuters: “The appropriate level (of the JPY) basically to be decided by the market. But it should not be decided by speculative moves, but reflect the real economy. If the exchange rate is one that settles down gradually, we would not reject that. But I think that the current moves are too speculative and as a result the JPY rapidly becoming too strong.” He adds that the authorities could take “appropriate action at the appropriate time.”
- US: New York Fed President William Dudley said that current conditions of high unemployment and low inflation are “unacceptable”, and notes that “Further action is likely to be warranted unless the economic outlook evolves in such a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."
- Chicago Fed President Charles Evans said “The size of the unemployment gap, combined with the fact that inflation has been running below the level I consider consistent with long-term price stability, suggests that it would be desirable to increase monetary policy accommodation to boost aggregate demand and achieve our dual mandate.”
- Philadelphia Fed President Charles Plosser tells the FT “I think that before we engage (in further quantitative easing) we need to be very clear about what it is we’re trying to do, how we’re going to go about doing it, how we’re going to measure whether we’re effective at it or not, and how we’re going to communicate that.”
Ireland stole the headlines over weekend: all over the UK Times, FT, WSJ etc.
On the bailout: It seems even more subordinated bond holders are mobilising to oppose the govt’s plan to force them to share some of the pain and not just the owner of Chelski. Again, not much to worry about there (given the bonds are only worth 2.2bn). The government could eventually back down if necessary, but legal argument could easily delay the whole rescue process. Remember that the EU needs to see the final plan before it decides to either give it the green light or block it. Articles focus on the horrible deficit-to-GDP forecast for this year, but almost all fail to point out that although the deficit number is affected this year, Ireland will pay for the bailout over a 10 year period, so that next year’s bond issuance is unlikely to be seriously affected.
The Irish Government plans to impose even more fiscal austerity to balance the books. On Dec 7, will announce a 4-year plan to bring the deficit down to 3 percent of GDP by 2014. I doubt the govt will survive. It will probably not see in the New Year. Local press are claiming movements are afoot to oust the opposition leader (i.e. Enda Kenny who is a real liability at the polls) in preparation for a general election early in 2011.
Some internet sites were reporting a UK Times carrying an article saying Ireland’s Sovereign Wealth Fund the NPRF (National Pension Reserve Fund) is to bailout the government to the tune of €20 bn. Article doesn’t exist as far as I can see. There is a grain of truth to the claim though it has to be said. First, the SWF has €24.1bn ammo. But €6.8 bn of this already invested in Allied Irish and Bank of Ireland shares (as a result of bailouts earlier this year), leaving €17.3 bn for further recapitalisations. The Govt has already made it clear that if the proposed issue €3bn worth of AIB shares goes badly, the SWF will underwrite the issue. Will the issue go well? Sunday Times quotes Dublin fund manager saying there isn’t “a snowball’s chance in hell” of that happening. So the SWF is a convenient source of cash of course, concentrating the exposure of your SWF in a failing/failed domestic bank sector could hardly be considered sound portfolio management. By comparison, New Zeland’s earthquake disaster fund chooses to invest a sizeable portion of its assets in overseas equities, on the grounds that if a natural disaster was to befall the country, NZD would probably weaken, and at least overseas assets would hold their value. Details on Ireland SWF:
The UK Telegraph claiming Irish Finance Minister was heckled on a conference call last week after the organizers failed to mute listeners to the call. When this was realised a free-for-all ensued, and call had to be restarted 20 mins later. A Government spokesperson said the claim is nonsense.
The Sunday Times says AIB to sell UK assets by March in bid to raise €1 bn. EURGBP positive at the margin.
Wolfgang Munchau in the FT says the stressed scenario built into the assumptions behind last week’s Irish bank recapitalisations are not severe enough. Says: “a real worst-case scenario would include stagnation for up to a decade, mass emigration, further falls in house prices, a significant fall in tax revenues, more austerity in response, and the further banking problems that would result from such a toxic mix. I am not predicting this scenario, but it is at least as plausible as Dublin’s naively optimistic V-shape-recovery assumptions.” Munchau says actual default might have been better than burdening the taxpayer, and austerity measures and not default, might actually “bring down Ireland.”
FT trawls through the stress test data and names the banks with the biggest exposures to Irish sovereign debt. A nice exercise, as articles back in July were mainly focused on exposures to Greece.
“RBS held £3.3bn ($5.2bn) worth of Irish government bonds in its banking book and another £958m in its trading book at the end of March, giving the group a total net exposure of nearly £4.3bn. Other groups with relatively big banking book exposures include Denmark’s Danske Bank, which owns National Irish Bank, French lenders BNP Paribas and Groupe BCPE, as well as Landesbank Baden-Württemberg, Germany’s biggest public sector bank. On the trading book side, the next biggest exposure after RBS was British rival HSBC with £816m, followed by Crédit Agricole at €759m and Société Générale at €458m.”
Also said Germany’s Hypo Real Estate, which listed more than €10bn in banking book exposure to Ireland, but FT wasn’t sure if this was gross exposure on net exposure due to possible short positions.
Lastly the Sunday Times reported over the weekend that the potential effect of switching Pension Annuity calculations to the Irish Yield curve could result in as much as €20bn of additional demand for Irish bonds, if enacted. This could potentially offer strong support to the Irish government bonds in the coming months. As I noted last week, the Society of Actuaries and the Irish Association of Pension Fund Managers submitted a proposal on this to the Government last week which would require a change in legislation. A final decision is expected to be made in November. Following last week’s announcements, the Irish Budget for 2011 which is due in early December, is now likely to become a focal point for investors. Speculation in this morning’s press that a combination of cuts in spending in excess of €4bn have not been ruled out by the Department of Finance. Irish Exchequer Returns to the end of September are scheduled for release late this afternoon which will be closely watched to ensure that last year’s Budget Plan remains on track. At the end of August, Tax receipts were 0.7 percent behind plan while Expenditure was also lower than budgeted, thanks largely to reduced Capital Expenditure.
PS: the Irish Central Bnak has this morning cut is GDP forecast to a anemic 0.2 percent for 2010 from 0.8 percent
Glad This Doesn’t Apply to Irish “Banks”!
A Swiss government expert group (Commission of Experts) looking at “too big to fail” banks, is recommending that UBS and CS should hold 19 percent total capital of which 10 percent should be common equity, by 2019. The remaining 9 percent should be in the form of CoCos. As part of the announcement, they propose two trigger points for which additional capital, mostly in the form of these CoCos, needs to be held against. Trigger 1 is at 7 percent common equity and Trigger 2 is at 5 percent. For Trigger 1 the buffer component asks for a max of 3 percent CoCos to be converted. The 5 percent trigger asks for a so-called “progressive component” level of capital of 6 percent in CoCos which should be converted to equity along with the implementation of a wind down plan which has been predetermined (a living will). In this emergency plan “systemically important functions would transfer to a new legal entity within a short space of time”. So overall the proposals basically means that UBS and CS should hold 40 percent more equity and 90 percent more total capital than the Basel 3 rules and also go beyond the current FINMA proposals. If followed through with, would cost each bank up to CHF75bn to meet requirements based on current balance sheet position including risk exposure levels. As part of the proposals they also recommend a 5 percent leverage ratio (3 percent is the Basel3 requirement). They are suggesting the same implementation periods as Basel 3.
The UK construction PMI rose to 53.8 in September, from 52.1 in August, contrary to expectations of a decline. The headline figure masked a marked sectoral divergence, however, with the housing activity index dropping by 5.6 points to 45.4, its first sub-50 reading for a year, while the commercial and civil engineering indices picked up to healthy levels of 58.8 and 56.2, respectively. Despite the upside surprise on the headline index, the outlook for the construction sector remains extremely challenging. As today’s survey indicates, the recent worsening in consumer sentiment, combined with the ongoing stagnation in mortgage lending, means that residential housing activity is weakening. A near-term resurgence seems unlikely. On top of this, it is only a matter of time before cuts in public investment start to weigh on civil engineering activity. Employment in the sector continues to shrink (the employment index fell to 45.3 in September) and business expectations in September were at their weakest since December 2008, in the midst of the global financial crisis.
Company Equity News
- Goldman Sachs (GS) may bid for 3 billion pounds of property loans being sold by Royal Bank of Scotland Group Plc (RBS), the Sunday Times reported, without saying where it got the information. Lone Star Funds and Blackstone Group LP may also submit bids in the next two weeks, the newspaper reported today. RBS hired Lazard Ltd. to advise on the sale, the Times said. Dan Lambert, an RBS spokesman, declined to comment and a spokesperson for Goldman Sachs
was not immediately available for comment.
- The U.S. Justice Department may decide as early as this week how to resolve its two-year antitrust probe of merchant restrictions imposed by Visa Inc. (V), MasterCard Inc. (MA) and American Express Co. (AXP), three people briefed on the matter said. The department still hasn’t decided whether it can reach a deal with the three biggest U.S. payment networks or challenge their policies in court, one of the people said. The department likely will file a lawsuit, and MasterCard and Visa are expected to settle, people familiar with the matter said.
- JPMorgan (JPM) may boost its dividend next year and rise as much as 45 percent during the next two years on the strength of its senior management team and acquisitions made during the economic downturn, Barron’s reported, citing analysts.
- SAP (SAP) CEO Jim Hagemann Snabe said Oracle Corp.’s (ORCL) technological strategy is wrong, referring to its acquisition of hardware producer Sun Microsystems and the appointment of hardware expert Mark Hurd, German weekly Focus quotes him as saying in an interview. Software companies like Oracle and SAP don’t need their own hardware as they can make use of external service contractors if they need server capacity, Snabe says according to the pre-report of the interview. An Oracle spokeswoman declined to comment.
- The U.K.’s energy regulator OFGEM group said today that Britain will have to spend about 32 billion pounds on pipes and wires in the next 10 years. That is an increase of 75 per cent and represents a doubling of the rate of investment from the previous 20 years, the regulator said in a statement today.
- BP (BP) plans to reduce its operations in the Gulf of Mexico to cut capital spending and rebalance its portfolio to pay for the Macondo oil spill, the Financial Times reported, without saying where it got the information. BP, the biggest operator in the region and largest license holder, is raising as much as $30 billion from asset disposals over the next 18 months and has said it will cut capital spending by about 10 percent this year to raise funds for the April 20 spill, the newspaper said.
- Anglo-Australian miner BHP Billiton’s (BHP) $38.6 billion offer for Potash Corp. of Saskatchewan Inc. (POT) reaches its first major hurdle this week as the Canadian government prepares to receive a key report on the economic impact of a sale. On Monday, an independent think tank hired by Saskatchewan’s government, will release its analysis on whether a sale will benefit the province. The report is expected to have significant influence on a later, legally binding judgment by Canada’s federal government on whether to allow the takeover. The report comes as the political climate in Saskatchewan has soured on the prospect of a foreign takeover of Potash Corp., the world’s largest producer of the key agricultural mineral. Saskatchewan holds more than half of the world’s known potash reserves. Saskatchewan Premier Brad Wall said last month that he would make up his mind on BHP’s offer after reading Monday’s report from the Conference Board of Canada, an independent think tank hired by the province to examine the deal. But Mr. Wall said his early opinion is that the deal doesn’t represent any “net benefit” to Saskatchewan. Federal rules require that any sale to a foreign enterprise must be shown to offer a net benefit to the country.
- Global steel demand growth will probably fall to 5.3 percent next year on slowing sales in China, the world’s largest consumer of the metal, the World Steel Association said. Demand growth will slow from the forecast 13.1 percent gain this year, the association said in a statement released in Tokyo today. China’s demand is likely to increase 3.5 percent in 2011, down from a projected 6.7 percent this year, the association said. China, which accounts for half the world’s crude steel output, faces slower growth next year as the nation’s economic stimulus measures phase out and the real estate market weakens, the association said. Slowing demand in China had led 40 percent of Chinese mills to idle plants or put them on maintenance, the China Iron & Steel Association said in August.
- Greece could ask Siemens AG (SI) to pay EUR2 billion in compensation linked to an alleged bribery case, Sueddeutsche Zeitung reports in its Saturday edition. The chairman of the investigation committee of the Greece parliament, Iosif Valyrakis, urges the Greek government and the country’s legal authorities to claim compensation payment from the German industrial conglomerate, the paper reports citing a document it has seen. Valyrakis argues that Siemens was granted profitable contracts for projects linked to the Olympic Games 2004 and from the incumbent telecom provider Hellenic Telecommunications Organization S.A. after making alleged bribery payments. A Siemens spokesman told Dow Jones Newswires that the company has done everything to elucidate the case and will fully cooperate in the future as well.
- Church & Dwight (CHD) could be next target for Europe firm Unilever’s (UL) $3.7 billion move to acquire U.S. hair-care and skin-care manufacturer Alberto-Culver may force European trade buyers and private-equity firms to target U.S. consumer-products company Church & Dwight Co. The list of potential buyers for C&D, which has a market capitalization of $4.5 billion, is led by U.K. household product maker Reckitt Benckiser. Despite possible operating earnings dilution, such a tie-up could be justified and offset by potential cost savings. It would mean continuity in Reckitt’s approach to mergers and acquisitions, with the company of late having opted for lower-margin businesses such as SSL International in the U.K., and would help it bulk up in the U.S., which accounts for 25% of sales. C&D’s products would complement Reckitt’s laundry portfolio with the addition of brands like Arm & Hammer and Xtra. It also complements SSL’s brands by adding Trojan condoms and ORAJEL oral analgesics. One caveat is that another deal would require precious management time when it is focused on the recent SSL deal.
- For the first time in more than a year analysts are cutting their forecasts for Standard & Poor’s 500 Index earnings, jeopardizing gains from the biggest September rally since World War II. Estimates for S&P 500 companies’ combined 2011 profit fell as low as $95.17 last month from an August high of $96.16 and posted the first quarterly reduction since the three months ended June 2009, according to more than 8,500 analyst forecasts tracked by Bloomberg. The revision came as the benchmark gauge for U.S. equities rose 8.8 percent last month, the largest September advance since 1939. Now, money managers at Stifel Nicolaus & Co. and USAA Investment Management Co. are preparing for weaker returns in October as Alcoa Inc.’s Oct. 7 report starts the third-quarter earnings season. Bulls say even with the decline in analyst estimates, equities remain cheaper based on forecast profits than at any time since 1988, excluding the six months after Lehman Brothers Holdings Inc.’s bankruptcy in 2008.