Preview from Europe: Onward and Upward for Equities

by: The Mole

Equities are still on a roll with the S&P hitting an 8 month high, rising 1.1% yesterday. Caterpillar (NYSE:CAT), Disney (NYSE:DIS) and Alcoa (NYSE:AA) led the Dow up while CIT Group (NYSE:CIT) soared 70% on its 11th hour (temporary) expensive reprieve from bankruptcy. Meanwhile way out West, California lawmakers and Governor Arnold Schwarzenegger said they’ve struck a deal to close a $26 billion budget deficit that’s left the most-populous U.S. state paying bills with IOUs and its credit rating near junk. In other “bullish” news the free market arm of the administration, Government, I mean Goldman Sachs (NYSE:GS), now expects the S&P 500 to rise 15% from current levels to 1,060 during 2009. The previous guess was 940. Credit Suisse also upgraded their target for the index to 1,050. The U.S. index of leading economic indicators rose 0.7% in June versus economists' estimates for a 0.4% rise. An optimistic NABE Industry Survey showed that almost half of U.S. companies believe sales have already bottomed out and their hiring outlook is starting to improve.

I may sound like a broken record but better than expected results do NOT = good earnings as the expectations had been massaged down to such low levels like in the cases of Eaton (NYSE:ETN), Johnson Control (NYSE:JCI), Hasbro (NASDAQ:HAS) and Halliburton (NYSE:HAL) yesterday. And after an 8% move in stocks in less than a week (on weak underlying earnings) I’m beginning to see the risk/reward take a turn for the worse. The recession isn’t over just because Jim Cramer and Larry Kudlow say it is, yet the market is priced for a miraculous recovery.

Today’s Market Moving Stories

  • Asian bourses scaled a 10 month peak overnight after headline earnings reports from the U.S. continued to lull investors into a false state of security that the recovery is taking a firm root.
  • Despite their cricketers' dismal showing at Lord’s, the Reserve Bank of Australia (RBA) has grown more optimistic on the outlook for economic growth both at home and abroad when it left interest rates unchanged at its July policy meeting. It still sees scope for further easing should an expected recovery not materialise. “Members observed that the early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” the minutes showed.
  • S&P 500 P/E RatioTexas Instruments’ (NYSE:TXN) CFO March warned that “the global economy is, by all indications, still declining. What we are seeing here is that the rate of inventory depletion slowed down quite a bit.”
  • The global economy has bottomed out but a sustained recovery still much depends on the U.S. consumer. Headwinds there remain strong (deleveraging, employment and wage growth). Fed governors Lockhart (recovery a longer and more gradual process) and Summers (pace of growth in 2010 still very much in doubt; no basis for near-term income growth) said nothing different last night. Unless we get signs of progress on the consumer side, it will be hard for risk assets to revel in good times for much longer. The next pieces of anecdotal consumer evidence from the U.S. are due on the 24th and 28th (confidence surveys), the 29th (Beige Book), the 3rd (auto sales) and 4th (June spending). The July Nonfarm Payrolls will follow on the 7th.
  • Bloomberg has an article according to which banks worldwide, and especially in the U.S., have made inadequate loan provisions. It said U.S. banks may incur additional losses of $470bn by the end of 2010. Moody’s is quoted as saying that it would be a mistake to believe that the crisis was over.
  • If you haven’t been keeping score, the cost of the bailout(s) is now estimated at $23.7 trillion.

Unemployment Office Is Hiring

Gentle Ben Spills The Beans
Fed chairman Bernanke took the unusual step of previewing his own testimony in an op-ed for the WSJ. Perhaps concerned that the public, markets and media are getting the wrong end of the stick, he thought it best to set out his stall directly. Pretty much what he makes clear is that the Fed isn’t going to tighten policy near term – it would rather allow the recovery to become entrenched than risk a double dip. A bit of context first. The brief statement that followed June’s FOMC meeting showed members believing the pace of economic contraction had moderated and that the risks to inflation had become more balanced. That was filled out in the minutes to that meeting published a few weeks later. The changes between the May and June meetings were subtle and did not really change the growing market view – that recovery, and hence exit strategies weren’t too far away. Today’s op-ed is an attempt to set the record straighter or at least take out the surprise value from the set testimony – a moderation in the pace of contraction doesn’t mean recovery and it doesn’t mean tighter policy.

LetHaving laid out the reasons why policy needs to remain accommodative for an extended period, Bernanke goes on to look at the ways in which the exits could eventually be achieved. He makes the point that the unwind is all about the reduction in the Fed’s balance sheet – and at current levels, there’s about $800bn to be taken out. Some elements of the balance sheet can be unwound naturally, as banks move reserves from the Fed and then put them to work in the open market and then decrease the use of Fed liquidity provisions. The maturity of assets provided to the Fed as collateral or in repo also cuts the balance sheet back naturally. The big issue though will be a two-prong strategy – to pay interest on reserves to get cash in, and then drain that cash off.


  • Early European equities on the move to the upside include UK supermarket group William Morrison (OTCPK:MRWSY) (+7%) after a positive trading update upgrading their full year fiscal guidance. Clothes retailer Next (OTC:NXTI) and luxury goods maker Hermes (OTCPK:HESAF) are also looking perky after the former lifted its forecast and the latter posted a 12% in revenues. Much troubled Volvo (OTCPK:VOLVY) has reported a bigger than expected loss while Swiss biotech firm Actelion (OTCPK:ALIOF) beat expectations and raised guidance.
  • Ford (NYSE:F) may get a lift today on news that its vehicle sales in China rose 14% to 197,212 units in the first half from a year earlier. Changan Ford Mazda, a tie-up with Chongqing Changan and Mazda (OTCPK:MZDAF), sold 140,386 cars in the first six month, up 20% from a year earlier. Sales of its all new Fiesta compact car, launched in March, came to 18,224 units during the period, while monthly sales of its mid-range Focus sedan averaged more than 10,000 units.
  • In analyst upgrades and downgrades, BA (BAY) was raised to a buy from a sell at Goldman Sachs while Germany’s biggest retailer Metro was downgraded to neutral from overweight at JP Morgan.
  • Davy’s are reporting that “Elan’s (NYSE:ELN) Q2 out-turn looks a little better than expected at the revenue, adjusted EBITDA and earnings lines. Given the recent J&J agreement and some comfort on recent Tysabri trends, we will upgrade our 2010 numbers to approximately $240m (at adjusted EBITDA) from $187m currently. We reiterate our ‘outperform’ rating as the growth story continues at the company”.

Data Ahead Today
Fed’s Bernanke testimony is at 15.00 (all times UK) today. The testimony has been pre-empted by Bernanke’s op-ed piece in the WSJ on the “The Fed’s Exit Strategy“, talked about above.

Notable earnings in the avalanche today come from Caterpillar (CAT), Coca-Cola (NYSE:KO), DuPont (DD), Merck (NYSE:MRK), Schering-Plough (SGP), United Tech (NYSE:UTX), Lockheed Martin (NYSE:LMT), Regions Financial (NYSE:RF), State Street (NYSE:STT), TD Ameritrade (NASDAQ:AMTD), United Health (OTCPK:UAHC), Apple (NASDAQ:AAPL), Yahoo (YHOO), Advanced Micro (NASDAQ:AMD) and Starbucks (NASDAQ:SBUX)

And Finally… I Am Partial To A Bit Of Unbiased Commentary

Disclosures: None