Preview from Europe: Stocks See Flowers - Not Just Green Shoots

by: The Mole

Like the energizer bunny with rechargeable batteries, the rally just keeps going, kicking sand in the face of the naysayer “it’s a suckers rally” bears. For all the earlier criticism, the 'not so stressful' stress tests have relieved stress because the extensive lead time to raise the equity is beneficial and will allow much of it to come from earnings retention. In addition, equity dilution is less than feared and risk of losses above the preferential shares in the capital structure now appears very remote. The knock-on reduced risk of preference shares converted to common stock fueled Friday’s equity rally, which reversed Thursday’s action as bank equities mostly outperformed credit. If financials grease the wheel that is the real economy, it is easy to see where the equity ebullience has come from.

Today’s Market Moving Stories

  • Chinese PPI and CPI for April were released this morning. Deflation accelerated by a bit more than the market expected – consumer prices are down 1.6% on a year earlier, while producer prices are 1.5% lower.
  • The Daily Telegraph believes that the Bank of England is going to give a very optimistic assessment of UK economic prospects in a coming report.
  • Even the catastrophic downturn in the Irish construction sector may have bottomed out, according to a new survey of activity in the sector. The Construction Purchasing Managers’ Index, a measure of overall performance in the construction sector, still shows that the building sector is shrinking but this was less dramatic in April (32.9) than the previous month (28.1). Employment still declined substantially, while the fall in activity and new business remained sharp but there are early signs of stabilization.
  • But some technical analysts are warning that the rally which kicked off on March 9th may soon stall at current levels because there are concerns about equity valuations. The recent rally has pushed 34% of S&P 500 companies above analysts’ price targets for the next year, a sign that the move may be overdone.
  • And the Telegraph's self-appointed prophet of doom, Ambrose Evans-Pritchard, chimes in with a more fundamentals-based bearish argument.
  • Japan’s biggest bank, Mitsubishi UFJ Financial (NYSE:MTU), said it is still planning a $254 million purchase of Citigroup’s (NYSE:C) Japanese trust bank NikkoCiti, denying a report that the deal was about to be derailed. Mitsubishi UFJ lost a bid this month to buy Citigroup’s key Japanese units, defeated by Japan’s No.3 bank, Sumitomo Mitsui Financial (OTC:SMFJY).
  • With Japanese banks reporting earnings this week, banks on the Nikkei have risen sharply and the sector should continue to outperform, especially now that the US stress tests are out of the picture for a while. With Chinese FAI data out this week likely showing further growth, high beta stimulus plays can continue to outperform in the near term, even though valuations are not especially attractive at this point.
  • Japanese brewer Kirin (OTCPK:KNBWY) has agreed the terms for a $2.5 billion takeover of Australia’s No. 2 brewer Lion Nathan (OTC:LNNTF), in continuation of their aggressive push to make acquisitions.
  • C&C will report full-year results on May 12th. On current trading and outlook, it is likely to highlight the strong performance of the premium Magners cider brand in the UK off-trade market.
  • A very interesting piece on how last minute lobbying made the stress tests less punitive for the banks.
  • A view from abroad of the country formerly known as the land of saints and scholars.
  • Impress your boss with some innovative thinking.

Capitalism Is Dead
Capitalism Is Dead

Bottom in Sight for the U.S. Economy
The U.S. economy is expected to begin growing in the second half of this year, while the jobless rate is expected to peak in the first quarter of 2010, according to a survey of top forecasters released on Sunday. The consensus forecast of panelists surveyed in the Blue Chip Economic Indicators newsletter for May predicted economic growth, as measured by real gross domestic product, would shrink 2.8% in 2009 but grow 1.9% in 2010. The economic downturn is expected to ease in the second quarter of this year after sharp declines in the fourth quarter of last year and the first quarter of this year, the survey said. Growth is forecast to resume in the third quarter.

Added to that, Christina Romer, head of the Council of Economic Advisers, predicts a return to positive growth rate in Q4, and an increase in economic growth of nearly 3% in 2010, which is close to trend growth, with unemployment peaking at 9.5%. However I have to disagree with all this newfound optimism. I believe the recovery will be more sluggish. Note that a couple of months ago, commentators were forecasting another Great Depression, while now they are talking about an immaculate recovery.

And Finally… Geithner Speaks About the Bank Stress Tests (SNL parody)

Disclosures: None

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