Report From Europe: Q2 and Earnings Boost Sentiment

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 |  Includes: DIA, QQQ, SPY
by: The Mole

European markets open firmer today and continued to grind higher all morning after minutes from the Federal reserve showed policy makers are prepared to add further QE. Intel (NASDAQ:INTC) also added to the positive tone by reporting Q2 profit of 52c versus expectations for a 50c print. Gross margins came inline for the quarter but guidance was up for Q3. ASML followed suit this morning and rallied 3 percent after saying Q3 profit rose to €268.5m beating broker estimates for €247 million. Fellow Euro tech names STMicoelectronics (NYSE:STM) and Infineon (OTCQX:IFNNY) are better by 3 percent and 4 percent respectively in sympathy.

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Today’s Market Moving Stories

  • Britain needs interest rates to stay low for as long as possible to help its property market become “steadier” without swings in prices that make homes affordable, Housing Minister Grant Shapps said. “It’s really important that we keep interest rates low for as long as possible,” Shapps said at a conference for the homebuilding industry in London yesterday. “The biggest problem at the moment is that people can’t afford to buy your product because they can’t get the lending to get it.”
  • UK consumer confidence falls hard. Coming in at a dismal 53 in September (very a consensus for 59 & a previous read of 62). The newspapers are full of doom and gloom clearly having an impact on confidence. UK Times today predicting UK govt cuts will cost 1 million jobs. A big, suspiciously round, number – clearly the fruit of meticulous and careful calculation. But its lack of accuracy doesn’t matter – what matters is that stories like these will continue to hurt confidence. And confidence affects behaviour. Hence house prices, car sales & retail sales all falling. And sterling will soon join them.
    Bank of England policy maker David Miles said officials must not withdraw stimulus too soon, signalling that they may have to ignore an inflation rate that still exceeds the government’s 3 percent limit. The bank faces the “risk of tightening monetary policy too soon,” Miles said in a speech in Dublin today. This risk “is one that I would consider small if it were clear that the economy was on a typical upswing of the sort of cycle we used to think normal. But I do not see many of the signs that are usual in a normal upswing.
  • Fresnillo, the world’s largest primary silver producer, is ahead by 2.9 percent this morning after saying output increased to a record in Q3. Elsewhere with the Obama administration lifting the ban early on deep water drilling oil services names TGS Nopec and PGS (PGS) rose 10 percent & 4 percent respectively, while Transocean is better by 4 percent .
  • Separately, Petrofac has gained 4.1 percent on a broker upgrade from Morgan Stanley who raised their recommendation for the oilfield-services provider to “overweight” from “equal weight.
  • But Rockhopper Exploration has plunged 13 percent after its advisers said resources may be lower than expected. The explorer, which is searching for oil and gas off the Falkland Islands, said it plans to hire a rig to drill wells and commission additional seismic studies after consultants said that resources may be 30 percent less than estimated
  • Bodycote (OTC:BYPLF) has rallied an eye catching 11 percent after the supplier of metal-strengthening services said sales in the remainder of the financial year should be stable and it expects annual operating profit at the upper end of the range of analysts’ forecasts.
  • Standard Chartered (OTCPK:SCBFF) surprised the market with £3.3 billion rights issue to shore up their balance sheet and increase Tier 1 from 9-11 percent. Singapore’s SWF Temasek said that they would take up their rights. This stock opened down 4 percent and is currently trading -2 percent. Barclays was off 1.6 percent as investors wondered whether this was the thin end of deluge of rights issues by banks.
  • And luxury goods maker Burberry’s (BRBY) has shed -2.3 percent despite posting revenues that were in line and saying full year 2011 PBT was expected at “top half” of consensus range. Following positive news flow within luxury recently and Burberry’s strong outperformance over the past six weeks there was limited upside from its current range and it seems investors had expected them to upgrade their outlook. In Germany the DAX again breaking new highs as it is heading for its highest close since September 2008. JP Morgan just announced Q3 EPS $1.01 versus the expected 88c, with loan loss reserves reduced by $1.5b this quarter, Q3 Core Tier 1 at 11.9 percent.

FOMC minutes

They kept hopes alive that another round of QE might begin as early as Nov 3 (but the minutes sensibly didn’t mention any timetable, despite TV reports to the contrary). Instead, “several” members considered it appropriate “to take action soon” or “before long”, but text stressed any additional easing still hinges on economic situation and outlook (although given payrolls was so bad, looks like this condition already met)
Unusually, New York Fed economist Eggertsson was in attendance. Eggertsson’s field of expertise is the conduct of monetary policy when interest rates are near zero. This is to me potentially very significant. He last appeared at an FOMC meeting in Dec 2008 (the meeting where the original MBS purchase program was launched). The FOMC discussion points didn’t tell us anything we hadn’t heard already over past 3 weeks, but Eggertsson’s presence gave the market an excuse to sell USD in response. The Euro was the main beneficiary. Equities also took heart: S&P500 closing +0.4 percent higher (although better Intel results probably helped).

But what type of easing planned? The minutes were very vague on this crucial question (and on this question hangs the short term fate of the USD). The FOMC were said to have “focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations.” Possible strategies mentioned included “providing more detailed information about the rates of inflation…consistent with its dual mandate, targeting a path for the price level…and targeting a path for the level of nominal GDP.” Hmmm.…suggests they may commit to keep buying USTs until value of an economic variable looks like it is trending toward a particular yield level. Tune into Bernanke’s monetary policy speech on Friday for further details.

For a preview of helicopter Ben’s speech this Friday from a usually very well informed source. Well worth a read.

Ask Not What Your Country Can Do...Click to enlarge


Company / Equity News

  • U.K.-based lender and Liverpool FC sponsor Standard Chartered PLC said Wednesday it plans to raise about £3.26 billion in a rights issue to augment its capital position as new global capital rules take effect. The bank said in a statement it plans to offer one share for every eight shares held at £12.80 each, or HK$156.82 per share for Hong Kong shareholders. The share price represents a 33 percent discount to the bank’s closing share price in London Tuesday of £19.085, and a 32 percent discount to the Hong Kong closing price Tuesday of HK$230.00. Stan Chart’s fund-raising plan comes as the so-called Basel III capital rules begin to take effect. Under Basel III, internationally active banks will have to hold capital equal to at least 7 percent of their assets, much higher than current standards. Some rules start to take effect in 2013, but most banks will have until 2019 to comply.
  • Bondholders of Irish Nationwide Building Society, a state-backed mortgage lender, are getting together to confront the government over losses they might suffer as part of a reorganization, the Financial Times reported, citing a person familiar with the matter. Holders of some of the lender’s subordinated bonds have mandated law firm Bingham McCutchen LLP to set up a conference call tomorrow and to bring in senior bondholders, according to the newspaper. Bondholders of Anglo Irish Bank Corp., which is also under state control, are forming a similar group, the FT added, without saying where it got that information.
  • Investors were hoping for a sign from Intel Corp. (INTC) that the bottom didn’t fall out of the consumer personal computer market in the third quarter. The company showed Tuesday that the market held up reasonably well and should stay steady into the all-important holiday shopping season. Intel shares rose slightly after the world’s biggest maker of microprocessors, the “brains” of PCs, reported that its net income leaped 59 percent and revenue rose 18 percent. The results topped analysts’ expectations and showed that economic jitters didn’t ruin consumers’ appetite for new computers during the back-to-school crush. Intel’s fourth-quarter forecast suggests that demand is expected to stay solid. It was what many anxious investors had hoped to see, since the fall quarter was widely considered a bust for PC makers, and some feared the winter period would also be bleak. Intel shares rose 19 cents, about 1% percent, to $19.96 in extended trading. Before the release of results, they closed the regular trading session up 21 cents, or 1.1 percent, at $19.77. Intel is a bellwether because its chips are inside 80 percent of the world’s PCs, and the company has unparalleled insight into whether the largest computer makers are preparing for robust sales, or bracing for bumps in the road. And as the first major technology company to report third-quarter earnings, Intel is a harbinger of what Wall Street can expect from other computer companies as they report in the coming weeks. Intel said after the market closed that it earned $2.96 billion, or 52 cents per share, compared with $1.86 billion, or 33 cents per share, a year ago. Analysts expected 50 cents per share, according to a Thomson Reuters survey.
  • Dutch semiconductor-equipment maker ASML Wednesday posted a better-than-expected rise in third-quarter profit, reiterated that it expects full-year sales to be 10 percent to 15 percent above their historical peak, and said it has orders booked for delivery in 2012. ASML, the world’s largest maker of lithography systems that map out electronic circuits on silicon wafers, also said it expects fourth-quarter sales of around €1.3 billion, and that it sees a gross margin in the fourth quarter of around 44 percent, as it kicked off the technology earnings season in Europe.
  • Google (NASDAQ:GOOG) boosted its U.S. market share in September, following three months of losses, ComScore Inc. said. Google’s share climbed to 66.1 percent last month, from 65.4 percent in August, according to Reston, Virginia-based ComScore. Yahoo! Inc. (NASDAQ:YHOO), which is ranked second in the market, fell to 16.7 percent from 17.4 percent, while third-place Microsoft Corp. (NASDAQ:MSFT) edged up to 11.2 percent from 11.1 percent.
  • Separately Google.’s Android operating system helped smartphone makers who use the software win market share from Apple Inc.’s (NASDAQ:AAPL) iPhone in the second quarter, researcher ISuppli said in a report today. HTC Corp., which makes some of the Droid models for Verizon Wireless (NYSE:VZ), increased shipments 63 percent from the first quarter, boosting its share of the global smartphone market to 8 percent, ISuppli said. Samsung Electronics Co., which released the Galaxy line of Android devices, increased shipments by 56 percent. Android is gaining popularity as more manufacturers take advantage of the software that Google offers for free. ISuppli has projected that it will be used in more phones worldwide than Apple’s software by 2012
  • Switzerland is CRH’s second largest market in Europe, representing an estimated 13-14 percent of group profits, with 60 percent of this coming from materials and most of the remainder from distribution. It is, therefore, of note that the latest data on the cement industry show that deliveries were up over 6 percent yoy in Q3, which continues the strong momentum in H1 (+6.5 percent). This is being driven by both the residential sector and infrastructure. Our forecasts have 4-5 percent growth pencilled in for the Swiss Materials operations, so this continued momentum more than underpins our estimates for the European Materials division.
  • Readymix (majority owned by global cement producer Cemex) has announced this morning that it has received an approach from unnamed parties regarding a possible offer for the company. While the group has endured a torrid time on the operating front, reporting a revenue decline in H110 of -30 percent yoy (versus -29 percent in H209 and -45 percent in H109), Readymix is supported by a strong balance sheet, with a marginal net debt position of €2.1m

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