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With bond markets and banks closed for the Columbus Day Holiday yesterday Equity markets had their lowest volume day of the year with the S&P future trading in a 2 point range for a majority of the session. We did have a tick lower at when Janet Yellen (new Vice Chair of the Fed) strayed from her usual uber-dovish line made some comments regarding Fed Policy and Risk Assets saying that it was “conceivable that accommodative monetary policy could provide tinder for a build up of leverage and excessive risk taking” . The dollar managed a small bounce (+.45 percent) and commodities were mixed (Crude -.9 percent, Gold/Copper +.3 percent).
A Hollow Victory
Today’s Market Moving Stories

  • The FT reports that regulators are struggling to create a global mechanism that could wind down a big financial institution without the disruption caused by Lehman Brothers’ collapse in 2008. The US is due on Tuesday to propose its own so-called “resolution” regime that would allow officials to stabilise a big, distressed bank, sell off assets over time and force creditors to take a discount on the value of their debt, without taxpayer money or market disruption. But policymakers attending meetings around the International Monetary Fund and Institute of International Finance criticised the US regime and cast doubt on whether anything but a modest set of principles could be agreed at the Group of 20 meeting in Seoul next month. Paul Tucker, deputy governor of the Bank of England, said it was a “mistake” by the US to equate keeping a seized bank open with a bail-out. He questioned whether the system could work if no buyers were on hand to pick up some assets. Mr Tucker said he thought employees would stop coming to work at an institution slated for closure. “And I suspect that even if it’s risk-free, some counterparties will move away because what’s the point of dealing and placing money with an institution that has no future?” he said. European policymakers want to allow “open bank resolutions” that keep an institution running, but the US is opting for a system of mandatory liquidation, partly because the multibillion dollar bail-outs of AIG and Citigroup created immense political pressure for creditors, shareholders and executives to bear financial responsibility. The US is also far less enthusiastic than some Europeans on the introduction of instruments such as “contingent capital” and “bail-ins”, designed to convert debt holders’ stakes in a bank into more loss absorbent equity when it gets into trouble.
  • A U.K. housing market gauge fell to a 16-month low in September as the number of properties for sale exceeded demand from homebuyers, the Royal Institution of Chartered Surveyors said. The number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 36 percentage points, down from minus 32 points in August, the London-based group said in an e-mailed report today. That’s in line with the median forecast of 14 economists surveyed by Bloomberg News. A measure of price expectations fell to minus 41, the lowest since March 2009. The housing market is showing signs of faltering as Britons prepare for the deepest public-spending cuts in a generation.
  • And the latest report from the British Retail Consortium showed a slowing in sales values, with total sales rising by 2.2 percent y/y compared with a 2.8 percent y/y rise in August. Food sales values rose by 4 percent 3mma/y, reflecting strong food price inflation, while non-food values rose by 1.4 percent 3mma/y, although furniture and floor coverings were reported to have seen a drop in sales relative to a year ago. The overarching messages from the report are that consumers remain cautious ahead of the announcement of government spending cuts and that real incomes are being squeezed by elevated rates of food price inflation.
  • After attendance at the IMF meeting at the weekend, press reports indicate that the Minister for Finance is on a roadshow with international investors in the US. The primary objective will be to convince the market of the commitment to reducing the fiscal deficit and the ability of the State to manage the exposure to the banking system, so it is with interest this morning that we watch his comments around senior and subordinated bondholders. The FT reports that the Minister indicated that he is till opposed to senior bondholders having to accept any losses as part of the banking sector bail out, but added that if Anglo Irish and INBS wanted to enter “amicable discussions” with senior bondholders (typically, this would involve a swapping short dated bonds for longer dated ones), then he would back the talks. Ireland is in the process of drafting legislation looking at the treatment of junior bondholders in the two aforementioned banks, but the Minister was emphatic that the law would not deal with senior bondholders “under any circumstances”. Bank subordinated and senior bond markets have been volatile recently in the lead- up to this legislation and concerns about the wider sovereign, however, the Minister’s reiteration of the position of senior bondholders should provide additional clarity.

Firecracker Currencies

Currency Wars?

UBS note today that the ever excitable print media are voicing concern that the world is about to embark upon a global merchantalist “currency war,” as countries try to simultaneously devalue their way to export-led recovery. Such a war will fail: the world can not have simultaneous devaluations, nor simultaneous export-led recoveries. But before such apocalyptic fears take hold, it is worth reflecting that, since the start of 2007 (i.e. before the onset of the financial crisis), major currency pairs have not moved much. The dollar values of the Euro, Sterling and Canadian dollar are within 20 percent of their January 2007 level. The Swiss franc has moved less than 20 percent against the Euro. Only the Australian dollar (24 percent) and the Yen (31 percent) have made larger moves. To date, the “war” has all the ferocity and horror of a global pillow fight.

We may not have a currency war now, but it is possible that politicians will move to a combative position. This raises the rather obvious question – what can currency devaluation (amongst the major economies) actually achieve? Theory suggests that devaluing a currency cheapens the (foreign) price of exports, and raises the (domestic) price of imports (creating a stronger net export position). Sadly this pricing theory is too simplistic. FX depreciation will not turn a domestic demand economy into an export-led economy.

Why currency wars are futile: The first problem with currency wars is that the global trading environment is a lot more complex than in the 1930s or the 1970s. With trade accounting for around a fifth of the world economy and with lengthy global supply chains sourcing components from all over the world, the benefits of a currency shift are less obvious. FX depreciation may raise component costs for domestic manufacturers, rather than shifting demand patterns away from imports.

The second problem with currency wars is that importers and exporters (the front-line troops) disobey orders. Exporters are supposed to cut their foreign prices – but they don’t. Importers are supposed to raise their domestic prices – but they don’t. With the exception of the commodity space, importers and exporters price to market (and only shift their prices if indigenous competitors do). This means consumers on the home front have no incentive to shift their consumption patterns when a currency depreciates.

Nuclear war

The limited impact of FX depreciation assumes companies have time to adjust to the FX shifts. European exporters coped with a near doubling of the euro’s value against the dollar earlier this century because the move was spread out over several years. A really substantial (30 percent plus) FX move in a single year will change prices and demand patterns. However, the dislocation and political response to such a degree of FX depreciation is likely to produce the economic equivalent of a nuclear winter. That is the war the world needs to fear.

Company / Equity News

  • C&C delivered an EBIT of €67.9m and adjusted eps of 16.7c during its first half, broadly in line with expectations. The numbers are complicated by acquisitions and disposals over the past year but we note a 8.6% drop in underlying Irish cider profit; a 13 percent rise in UK cider profits; an effectively debt-free balance sheet; an increase in Tennants synergy benefits to €18m (from €12m); (4) a 10 percent rise in the dividend to 3.3c; (5) exported cider (especailly to the US and Australia) now accounts for 12 percent of Magners volume. Guidance for the FY is unchanged which implies EBIT wil rise about 16 percent helped by M&A and organic development. Headwinds include adverse movement in Sterling v the Euro, the absence of a World Cup effect next summer and concerns about consumer sentiment in Ireland and the UK during 2011. C&C trades on an EV/EBITDA of about 8x which is low if you believe it is ultimately destined to be part of a global drinks group.
  • Bloomberg reports that Uganda is set to approve Tullow Oil Plc’s (OTCPK:TUWOY) sale of oil field assets to Cnooc Ltd. (NYSE:CEO) and Total SA (NYSE:TOT), said Patrick Bitature, the chairman of the Uganda Investment Authority. “Government has given a nod in principal,” Bitature told reporters today in the capital, Kampala. Planned investments by Cnooc and Total are expected to be reflected in the authority’s reports for the last quarter of the year, he said. Tullow, the U.K. explorer with the most licenses in Africa, announced plans for a three-way partnership with Cnooc and France’s Total after acquiring stakes owned by Heritage Oil Plc, its former partner in Ugandan oil blocks. While there is a moratorium on awarding new oil exploration blocks because of pending legislation, Cnooc and Total’s participation will be approved because they are joining an already licensed project, Bitature said. “We look forward to another successful quarter to crown the year 2010,” he said at the unveiling of an investment report for the last quarter. “We hope we will be able to include the investments in the oil and gas sector.” Tullow and Heritage found commercially viable oil deposits in Uganda. The explorer acquired Heritage’s interest in two blocks for $1.5 billion in August after Uganda gave conditional approval for the sale in July. Uganda has an estimated 2 billion barrels of oil, with 800 million barrels already discovered, according to Tullow. Tullow, Cnooc and Total will develop fields in the Lake Albert basin, which may pump more than 200,000 barrels of oil a day in 2014 or 2015. The explorer increased its estimate for discovered resources in Uganda to 1 billion barrels of oil from an earlier forecast of 800 million barrels. Uganda is set to become an oil producer when London-based Tullow begins production at the Kasamene field next year.
  • Google’s (NASDAQ:GOOG) share of the U.S. search advertising market grew more than two percentage points to 77.9 percent in the third quarter, making it the “early winner” as rivals Microsoft Corp. (NASDAQ:MSFT) and Yahoo Inc. (NASDAQ:YHOO) began to integrate their search operations, according to a report to be released on Tuesday. The report from online marketing firm Efficient Frontier Inc. added that Google will likely pick up an incremental share of U.S. advertisers’ search ad budgets in the fourth quarter as Microsoft and Yahoo continue to merge their search infrastructure. And separately Google is using its vast database of web shopping data to construct the ‘Google Price Index’ –a daily measure of inflation that could one day provide an alternative to official statistics.
  • European equity markets have opened weaker this morning following lower closes in the majority of Asian markets overnight. The moves lower followed China’s decision to increase the reserve requirements for six of its lenders by 0.50 percent for two months. While the move is relatively small, it is the indication that China may look to increase interest rates to cool the economy that is concerning markets this morning. Despite the short-term negative response economic data has been strong out of China and while moves higher in interest rates may initially be viewed as negative I believe they are prudent for the longer-term sustainability of growth. The move has also impacted currency and commodity prices with the dollar strengthening against both the €uro and sterling while commodity prices including copper, crude and Gold are all trading lower leading to weakness in mining & basic resources stocks today. We’re also seeing some profit taking ahead of the release of the FOMC minutes tonight (at 7pm BST) as some investors begin to worry that we not get the shock and awe QE2 from the Fed that’s baked in the current price. Looks like being a “risk off” day.
  • Note that Intel (NASDAQ:INTC) reports earnings after the bell in NY tonight (WPS of $0.50 expected).
  • The world’s largest steelmaker, ArcelorMittal (NYSE:MT), has retreated 1.3 percent Tuesday after Posco cut its full-year profit forecast by 7 percent and reported the first decline in earnings in four quarters. And ThyssenKrupp (OTCPK:TYEKF), Germany’s biggest steelmaker, fell 2.1 percent in sympathy.
  • While in London, Punch Taverns sank 9.3 percent after writing down the value of its pubs. Pretax profit excluding one-time items fell to £131 million in the year ended Aug. 21, compared with £160 million in the same period a year earlier, the company said in a statement.
  • And Nobel Biocare slid 7 percent after a broker downgrade at UBS changed their call on the stock to a “sell” from “neutral.” Also to the downside today is Soco International , a U.K. energy explorer in Africa and Southeast Asia. The stock has collapsed 19 percent today after the company said it will plug and abandon its appraisal well offshore Vietnam.
  • Adidas has lost 1.1 percent today as CNBC reported that Nike Inc. (NYSE:NKE) may become the official apparel maker for the National Football League from 2012. The apparel agreement would last for 5 years and is subject to owner approval.
  • Elsewhere Audika, the French hearing-aid retailer, dropped 5.8 percent as it reported a decline in third-quarter revenue to €19.8 million ($27.5 million) from €20.7 million a year earlier.
  • But Daimler rose 2.4 percent, with automakers posting the only gain among 19 industry groups in the Stoxx 600. UBS raised the luxury-car maker to “buy” and increased its price estimate by 36 percent to €53, saying it expects a faster recovery in profits for trucks.
  • A Solid Foundation

  • Microsoft has unveiled nine new phones with its Windows operating system after an overhaul aimed at reversing share losses to Apple Inc.’s (NASDAQ:AAPL) iPhone and Google Inc.’s Android software. The Windows phones will be sold in the U.S. by AT&T Inc. (NYSE:T), the country’s largest phone company, and Deutsche Telekom AG’s (DT) T-Mobile USA unit, the companies said today in a statement. AT&T will sell the phones starting on Nov. 8 and the devices will go on sale in Europe on Oct. 21, the companies said at events in New York and Germany.
  • General Electric (NYSE:GE), due to report earnings Friday, has won a $450 million order to provide equipment for a thermal power plant from South Korea’s SK Engineering & Construction Co., Yonhap News reported today, citing the U.S. company.
  • The UK’s Daily Mail reports whispers from within the multi-billion pound luxury goods sector suggests that the Avon lady is about to be taken over. For donkey’s years the catchphrase ‘Avon calling’ accompanied by door chimes has been associated with sales reps who went from door-to-door hawking the US cosmetic giant’s products. It has been a highly lucrative business for many ‘local’ agents and Sunderland-based Debbie Davis recently became the first Avon rep to earn more than £1million by knocking on doors. Avon Products Inc’s (NYSE:AVP) shares have been in strong demand in New York of late and improved a further 1.2 per cent to $33.33 early yesterday amid hot gossip that it is attracting the attention of several big industry players. L’Oreal, the world’s largest cosmetics and beauty company, is rumoured to be lining up a cash offer in excess of $44 a share. Procter & Gamble (NYSE:PG) and Anglo-Dutch giant Unilever (NYSE:UL), 20p off at 1794p, are both believed to be keeping a close eye on the Avon situation. Dove-to-Aviance beauty group Unilever recently agreed to acquire Alberto Culver, the world’s sixth largest hair care manufacture, for £2.3billion, so looks to have enough on its plate. But dealers hear that chief executive Paul Polman could still be interested in Avon, whose boss Andrea Jung is one of the longest tenured female chief executives in the US.
  • China has discovered eight potash deposits in the west of the country with combined reserves of 468 million tons, China Daily reported, citing the China Geological Survey. The find means China may produce 80 percent of its domestic needs by 2015, easing its reliance on imports, according to the report. The nation is the world’s second biggest potash importer, according to the newspaper. And in related news China has also discovered new domestic copper deposits of 38.5 million tons through a nationwide exploration, the China Business News reported today, citing investigation results released by the China Geological Survey with the Ministry of Land and Resources.

Watch out For Food Price Inflation. A few Stories

The rice harvest in the U.S., the world’s fourth-largest exporter last year, may be at least 10 percent smaller than estimated, missing a forecast record output and pushing prices 30 percent higher, a producer’s group said. Rough-rice futures in Chicago may surge to $16 to $17 per 100 pounds by January after hot weather in producing areas of the U.S. curbed yields and lowered milling rates, said Dwight A. Roberts, president of the U.S. Rice Producers Association, who correctly predicted the grain would peak at $16 last year.

And Corn price have surged on growing fears of food crisis. Corn Crunch Means Costliest Beef in Quarter Century. Meat prices are poised to extend a 14 percent rally this year.

Also...

As the Farm Belt Bounces Back .For many crops, prices are climbing even as big harvests pile up, a rare combination. Farmland values are up while those for some other kinds of real estate languish. Debt on the farm is manageable. Incomes are rising. And trade, of which many Americans are growing wary, is for agriculture a boon. Asia’s economic vigour and appetites make the farm sector’s reliance on exports—once thought a vulnerability in some quarters—a plus today.

Disclosures: None

Source: Report From Europe: 'Risk Off' Ahead of FOMC Minutes and Intel Earnings