Report from Europe: Stocks Up Ahead of Key Earnings Week

by: The Mole

The Dow Jones had its best close for over a year last Friday on the 2nd anniversary of its record close. The markets certainly seem to be expecting good things from the forthcoming US earnings season judging by the recent price action.

Note US market activity will be lighter than normal today as the Columbus Day holiday closes the US bond market, banks, government offices and many businesses, though the stock market will be open for a normal day of trading.

Stocks which may see some action today include homebuilder KB Homes (NYSE:KBH) on news of an SEC investigation into accounting irregularities and disclosure issues. Investment bank Lazard’s (NYSE:LAZ) share price may be busy after the hospitalization of their CEO Bruce Wasssertein with a heart problem. Also Blackrock (NYSE:BLK) announced it was planning to list up to eight companies and to sell five others. Black & Deckers (BDK) is well bid today after the company raised Q3 guidance. Google (NASDAQ:GOOG) have had their price target raised by both JP Morgan and Goldman Sachs while Advanced Micro Devices (NASDAQ:AMD) is up after a “buy” recommendation from UBS. US Steel may see some selling after a Barron’s report of ample inventory and robust production capacity in the sector.

Shocks Expected!

This week, market attention should focus firmly on corporate earnings reports. The bulk of US financial institutions should release their Q3 results (including JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) (Wed), Goldman Sachs (NYSE:GS) and Citibank (NYSE:C) (Thurs) and Bank of America (NYSE:BAC), Merrill Lynch and CIT (Fri). Several large and important non-financial corporations (e.g. IBM, General Electric (NYSE:GE) and Nokia (NYSE:NOK)) also report.

Although the gradual stabilization in the global economic outlook has helped equity markets stage a robust upswing since the turnaround in late Q1, questions remain about the sustainability of the recovery and the uncertainty in the market is still high. The financial sector, which led the market down at the outset of the crisis, has generally outperformed, leading the market higher since March. Strong corporate results for Q3 would contribute significantly to the process of market normalization, increasing risk tolerance further and supporting market confidence.

Mostly positive Q2 corporate earnings reports suggest expectations for Q3 have adjusted higher, implying it will be harder for the consensus to be surprised on the upside this time. However, such concerns seem misplaced. For the S&P 500, the consensus expects a Q3 EPS decline of 11.8% qoq, or a paltry 0.7% rise for non-financials, which is not a high hurdle to beat. Pre-announcements are still negative with two negative announcements for each positive (this ratio was 2.6 going into Q2).

More Woe For The British Peso
Reports of Brown’s £16bn car boot sale (of the Tote, the Darford Tunnel and the Chunnel) is weighing on GBP this morning with the main activity coming on the London open and stops going off in GBP/USD below 1.5800 and EUR/GBP and above 0.9300. The Times Online article isn’t helping either as it quotes a Centre for Economics & Business Research (CBER) report to be published tomorrow that predicts that UK rates will be on hold till 2011 and will not reach 2% until 2014. Further Quantitative Easing is also predicted from the CBER.

And What Of The Greenback?
Acres of column inches about the demise of the Dollar debate over the last 24 hours.
Here are just a few selected snippets:

The Bank of Thailand Governor Tarisa Watanagase said (when asked whether the bank plans to diversify its fresh foreign reserves) “we are in the process of doing that. We’ll do what we can do.”

Writing in The Sunday Times, Irwin Stelzer argues that “there is no indication that the administration finds a USD decline undesirable, if it is gradual, despite Geithner’s strong-dollar statement. It is the possibility of a USD collapse that worries some at the White House.”

Writing in the FT, former deputy Treasury secretary Roger Altman states that “the dismal deficit outlook poses a huge longer-term threat. Indeed, it is just a matter of time before global financial markets reject this fiscal trajectory.” He argues that this “could lead to a punishing USD crisis. To avoid it, America’s leaders should commit now and in detail to implement deficit reduction once the economy has strengthened. Vague promises will not work”.

Also writing in the FT, columnist Wolfgang Münchau argues: “It is important not to confuse the international role of a currency and its exchange rate at any particular time. But in the case of the dollar, there is a link. A fall in the USD’s exchange rate would be a very useful contribution to global balance.”

Writing in The Sunday Telegraph, Liam Halligan argues that “the US government desperately wants a weaker USD – so boosting exports while lowering the value of America’s massive foreign debt. The currency markets will keep betting against the greenback as they know the Federal Reserve will do nothing to stop a weaker USD coming true. 'Benign currency neglect' is the cornerstone of Obama’s recovery strategy.”

So the US is “for sale” in non US Dollar terms. May be goods news for M&A and hostile takeovers.

Equity News

  • Philips (NYSE:PHG) kicked off the European Q3 results season this morning by releasing better than expected numbers as the Group reported net income of €176m compared to the consensus of brokers’ forecasts which had been seeking a €44m net loss. The stock is up 6.5%. GE is stronger by over 2% in US premarket on the back of these numbers.
  • Xstrata (OTC:XSRAF) continued to attract column inches in the weekend press, with the Sunday Times reporting that they are likely to walk away from a potential bid for Anglo American (OTCPK:AAUKY), effectively closing the door on that episode for six months. Separately, a more speculative article in the Observer focused on the Prodeco Colombian coal mine arrangement with Glencore that they expect to result in Glencore buying back the mine from Xstrata by March 2010 for $2.25bn as suggesting that Xstrata could bid for Anglo.There was nothing new in either story, and the only tangible news out this morning surrounding Xstrata is the announcement of the sale of its 70% stake in the El Morro copper and gold project to Barrick Gold (NYSE:ABX) for $465mln. Regardless of what happens with Anglo or Prodeco, questions will continue to be asked about where Xstrata’s next big deal is coming from.
  • Press reports suggest that Barclays (NYSE:BCS) is considering another accounting wheeze, this time for the CDO book, for around £4bn. It is said to be similar to the Protium deal which offloaded monoline and RMBS mark-to-market from the balance sheet into a new ‘independent’ company called C12, which was funded by Barclays and staffed up by Barclays, thus negating any true risk transfer. It’s all very canny but hard to get too excited about, Barclays’ track record of innovative accounting is now legendary.
  • Anglo Irish Bank (OTC:AGIBY) is said to be negotiating a sale of a €1bn real estate portfolio, including shopping malls in the UK, to an Irish property firm. With €28bn loans going into NAMA and asset sales similar to this, going forward, I see a €25-30bn ‘cleaner’ bank emerging from the ashes. I don’t think we will see a zombie bank or a wind down from here. Bank of Ireland and AIB both saw some buying this morning but the reaction to the NAMA landslide vote has been surprisingly muted thus far.
  • Fiat (FIATY.PK) is up 6.1% after Morgan Stanley repeated in a report that investors may not have fully accounted for synergy potential with Chrysler. ITV was raised to “buy” from “neutral” at Goldman Sachs, which cited valuation and said it continues “to see plausible acquisition interest” from RTL and Bertelsmann. Note such good news for cosmetics maker Estee Lauder (NYSE:EL) who were added to Goldman’s “conviction sell” list.

Columbus Day
For the day that in it, from Bob Dylan’s 115th Dream:
“But the funniest thing was
When I was leavin’ the bay
I saw three ships a-sailin’
They were all heading my way
I asked the captain what his name was
And how come he didn’t drive a truck
He said his name was Columbus
I just said, “Good luck.”

Disclosures: None