Report From Europe: Stocks Tread Water Ahead of Consumer Data

Includes: DIA, QQQ, SPY
by: The Mole

U.S. stocks rose Monday, sending the S&P 500 Index to a 4th straight gain, after the Group of 20 nations pledged to avoid “competitive devaluations” of currencies and investors bet the Federal Reserve will announce further bond purchases next week. Stocks wise DuPont (NYSE:DD), Kraft Foods (KFT) and Walt Disney (NYSE:DIS) all climbed more than 1.4 percent to lead gains amongst the largest U.S. companies. And Citigroup (NYSE:C) rallied 2.4 percent after Goldman Sachs added the shares to its “conviction buy” list. Elsewhere CommScope (CTV) surged 30 percent on news a private equity firm is considering a takeover while Office Depot (NYSE:ODP) also gained 3.5 percent after saying earnings will beat estimates.

Sites of Worship

Today’s Market Moving Stories

  • Ireland’s bad bank, NAMA, has made a profit of €140 million on a loan it bought from Anglo Irish for €40 million. The loan was valued at €80 million by Anglo when it was acquired by NAMA, but the original value of the loan is unknown. This is the first NAMA sale that has come to light in the press and should provide some relief to the sovereign. S&P in its much publicised downgrade of Ireland,
    included NAMA’s liabilities on the State’s balance sheet, but gave the NAMA assets a zero valuation. This sale calls into question S&Ps analysis and highlights that NAMA has steered on the side of caution and likely underpaid, for in particular, the non-Irish assets. The realisation of returns on the non-Irish book significantly eases the quantum of funds needed to be recovered from the Irish loans as it is often forgotten the quantum of loans in NAMA which are non-Irish.
  • NAMA is to acquire loans with a face value of €81billion for a consideration of approximately €38.5 billion. About 67 percent of these loans are based in the Republic of Ireland and approximately 6 percent in Northern Ireland. The rest are overseas, with the bulk of these (approximately 21 percent) in the UK. This means that approximately €16 billion of the face value of NAMA assets are from the UK and we suspect that many of these loans were purchased at favourable (for the taxpayer) values. We again suspect that more profits are likely on the sale of UK assets.
  • China, Asia’s biggest oil consumer, increased retail gasoline and diesel prices by 3 percent today as part of government measures to cool the economy and meet energy-saving targets. The ceiling for gasoline prices will rise by 230 yuan ($34.50)a metric ton and diesel prices will gain 220 yuan a ton, the National Development and Reform Commission, the top economic planner, said in a statement on its website yesterday. The economy grew 9.6 percent in the third quarter, the least in a year, as the government curbed credit growth, clamped down on property speculation and chased energy-efficiency and pollution targets. The NDRC’s last fuel-price adjustment was in June, when the agency cut the cost of gasoline and diesel.
  • The unexpectedly sharp jump in UK GDP in Q3 looks likely to delay a further bout of quantitative easing. The 0.8 percent quarterly gain was double the consensus forecast and above the 0.5 percent rise anticipated by the MPC in the August Inflation Report. The upside surprise came both from construction output, which jumped by another 4 percent after Q2’s 9.5 percent rise, and services, which registered another solid 0.6 percent gain despite signs of a slowdown in the survey evidence. The ONS has also assumed that energy output will rise sharply in September. These numbers will clearly ease near-term concerns over a possible double-dip in the UK economy and suggest that GDP growth this year will be a bit stronger than our previous forecast of 1.5 percent. With inflation still well above its target, they will also probably be enough to deter the MPC from reviving its asset purchases as soon as its next meeting in November. Nonetheless, I do not think that they transform the outlook of a pretty weak recovery once the full effects of the fiscal squeeze kick in next year and beyond. As such, I still think that the economy will need more support from monetary policy, probably early next year.
  • And Standard & Poor’s Rating Services said today that it had revised its outlook for the UK to Stable from Negative and affirmed the AAA long-term and A-1+ short-term sovereign credit ratings. S&P said that the government’s spending review had reduced the uncertainty about its political resolve to tackle the fiscal deficit and that the public debt ratio was likely to peak at a lower level (84 percent for gross debt, 80 percent for net debt) than S&P had previously forecast.
  • The Federal Reserve remains ready to provide additional support to the economy, and it could clearly bolster growth if it choose to restart a program of buying long-dated assets, a top central bank official said Monday. Federal Reserve policymakers “have stated their commitment to take further actions to bring interest rates down further should economic conditions warrant,” Federal Reserve Bank of New York President William Dudley said. But he noted there are limits to what the Fed can accomplish: “The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately.” Still, a program targeting longer dated securities “will ease financial market conditions” should the Fed decide to go that way, Dudley said. “To the extent that we can do things that improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so,” he said.
  • Markets in general emerged from the weekend G20 deliberations in a buoyant mood with most asset classes establishing gains, which has become commonplace in an environment of potential QE. Indeed the familiarity could be seen as a little strange in the sense that additional measures, beyond the Fed’s QE Lite have yet to be announced. The G20 may have left room for authorities to deliver on that line, but meeting hyped up expectations is another matter and I continue to favor disappointment trades overall.
  • Stocks on the move in Europe today include ARM (NASDAQ:ARMH) which has shed 6 percent even after reporting higher earnings. ARM said operating expenses increased 23 percent last quarter from a year earlier as the dollar declined. About 95 percent of the firm’s invoices are Dollar denominated.
    And Cairn Energy (OTCPK:CRNCY) has tumbled 6.6 percent after the Edinburgh-based oil explorer said it will have to write off the $185 million cost of two wells off Greenland after they failed to make commercial discovery. A third well was stopped on Sept. 30 at the end of the island’s summer drilling season. And Atkins has sunk 3.7 percent after being downgraded to “hold” from “buy” at RBS.
  • Go-Ahead Group has jumped 5.3 percent after the largest operator of London buses said trading has been “robust” in the period from July 4 to Oct. 25 and it is maintaining its full-year forecast. Separately, Chief Executive Officer Keith Ludeman will retire in July next year.
  • In Europe Software AG , Germany’s second-largest software maker, gained 3.2 percent after it reported a 20 percent increase in third-quarter profit and raised its forecast for the full year. Net income rose to €45.6 million from €38.1 million a year earlier, the company said, beating the €38 million average estimate of 11 analysts surveyed by Bloomberg.
  • And Royal KPN NV, the largest Dutch phone company, advanced 2 percent as third-quarter profit advanced and CEO Ad Scheepbouwer said he’s confident of achieving the company’s earnings outlook for 2011.
  • But the big loser on the Stoxx 600 today is the Swedish cosmetics maker Oriflame, which is off 10 percent after reporting a fall in Q3 net income to just €7.1m.

Company / Equity News

  • The US stock market is alive with rumours that Apple is about to launch an unprecedented acquisition – with Sony (NYSE:SNE) and EA (ERTS) just two of gaming’s mentioned targets. Apple (NASDAQ:AAPL) has $51 billion cash to spend – and, last week, Steve Jobs hinted at where that might go. “We strongly believe that one or more very strategic opportunities may come along, that we can take, that we’re in a unique position to take advantage of because of our strong cash position,” he told investors. “So I think that we would like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future.” Could those “strategic opportunities” include the purchase of a video games company? Some on Wall Street obviously think so.Kaufman Brothers have tipped EA, Netflix (NASDAQ:NFLX) and even Facebook as targets. But it today emerged that financial wires have also nodded to Adobe (NASDAQ:ADBE), Disney and – wait for it – Sony. Leading financial magazine Barron’s is reportedly suggesting that Apple faces “speculation that it could acquire Adobe Systems, Sony, or even Walt Disney”. Just imagine. It sounds crazy. But $51 billion and no debt is an enviable position particularly when you consider that, for its last fiscal year to March 31, 2010, Sony announced a net loss of 40.8 billion yen ($440 million dollars). The Japanese hardware giant is estimated to have a Market Cap value in the region of $40 billion – comfortably in Apple’s price range.
    Something massive could be a brewing.
  • German pharmaceutical and chemical company Merck Tuesday raised its full-year earnings guidance after reporting a better-than-expected 46 percent rise in third-quarter net profit, mainly due to lower than- anticipated costs at its pharma unit. Merck cautioned, however, that the recent massive rebound in its liquid crystals business appears to be losing steam, prompting the company to cut its sales growth outlook for the division to 35 percent from the previous 50 percent.
  • UBS (NYSE:UBS) said it swung a third-quarter net profit from a year-ago loss and struck an optimistic tone for a better fourth-quarter, as it reversed two years of heavy outflows from wealthy clients. The Zurich based bank’s net profit for the three months stood at 1.66 billion Swiss francs, from a CHF564 million net loss a year earlier. This topped analyst expectations, which averaged CHF1.17 billion in a Dow Jones Newswires poll. As with cross town rival Credit Suisse , earnings were hit by losses on the bank’s own debt, totalling CHF387 million at UBS’s investment bank. Banks can record gains if the value of their debt falls, since it becomes theoretically cheaper to repurchase it, and conversely book losses if the value of the debt rises. UBS was upbeat in its outlook, saying the current quarter would improve compared with a third quarter marred by low levels of client activity and a very strong Swiss franc against major currencies such as the U.S. dollar and the euro. “We are optimistic that an uptick in the fourth quarter will benefit all of our business divisions. We remain confident about our future and believe that we are on track to achieve our medium-term goals,” UBS Chief Executive Oswald Gruebel said in a statement. Most notably, UBS managed to reverse withdrawals at its flagship private bank. The unit recorded net new funds of CHF900 million in the quarter, compared with CHF5.5 billion in second-quarter outflows, which means clients are coming back as the bank restores profitability and puts a U.S. tax evasion probe behind it. Overall quarterly revenue rose 15 percent on the year to CHF6.66 billion, but slowed sharply from the second quarter, as income from trading collapsed and commissions and fees were hit by less client activity. The stock is off 5.5 percent today.
  • Bloomberg reports that shrinking revenue at U.S. banks, led by Goldman Sachs Inc. (NYSE:GS) and Citigroup (C), may continue to fall as the industry heads into what could be its slowest period of growth since the Great Depression. After the six largest U.S. banks posted record revenue in 2009, combined net revenue fell by an average of 8 percent in the third quarter from a year earlier and 16.3 percent over the last two quarters, according to data compiled by Bloomberg. Revenue so far this year is down by 4.1 percent, driven by declines in everything from trading at Goldman Sachs to home lending at Bank of America Corp. New laws restricting account and credit-card fees, as well as derivatives and capital rules, are also squeezing lenders. Next year will kick off a decade that will bring the “worst revenue growth” for U.S. banks in 80 years, according to Mike Mayo, a banking analyst at Credit Agricole Securities USA Inc. in New York. Net revenue at U.S. commercial lenders has expanded at a slower pace in each of the last three decades, falling to 6 percent in the last decade from 12 percent in the 1970s, according to Federal Deposit Insurance Corp. data.
  • Research In Motion (RIMM), maker of the BlackBerry smartphone, climbed the most in more than three months after co-CEO Mike Lazaridis demonstrated RIM’s new PlayBook tablet computer. Lazaridis, speaking today at a conference organized by software maker Adobe Systems Inc. in Los Angeles, scrolled through images and played video on the device, in a clip posted to YouTube.
  • ZTE Corp (OTCPK:ZTCOF), China’s second-biggest maker of telephone equipment, said it plans to buy $3 billion in semiconductor parts from Qualcomm Inc (NASDAQ:QCOM), Texas Instruments Inc (NYSE:TXN), Freescale Semiconductor Inc (NYSE:FSL), Altera Corp. (NASDAQ:ALTR) and Broadcom Corp (BRCM). The purchases would happen over three years and are aimed at helping ZTE improve sales to telecommunications customers in the U.S., according to an e-mail today from the Shenzhen, southern China-based company. The U.S. has become the focus of ZTE’s efforts to boost business, including agreements to sell two devices through Verizon Wireless.
  • ArcelorMittal (NYSE:MT), the world’s largest steelmaker, said Tuesday that third-quarter net profit rose from a year earlier, but warned that the remainder of the year will be tough with a forecast for lower prices and still weak demand. “In the third quarter the business performed towards the lower end of our expectations against a background of seasonally lower volumes, weakening spot prices and higher costs,” said Chief Executive Lakshmi Mittal. “Our outlook for the fourth quarter remains cautious as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences,” he said. The Luxembourg-based steelmaker posted a net profit of $1.35 billion in the three months to Sept. 30, up from $903 million a year earlier.

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