Report From Europe: Fall in U.S. Weekly Jobless Claims Cheers Stocks

Includes: DIA, QQQ, SPY
by: The Mole

US markets, albeit on very low volumes, moved higher on hump day as sentiment was boosted by a successful Portugal debt auction and talk surrounding further fiscal stimulus measures from the Whitehouse. The premium that investors demand to hold Portuguese 10-year government bonds instead of benchmark German bunds fell to 3.59% post the auction, after widening to as much as 3.72% earlier, while speculation mounted that Obama will announce an additional $180bn package.

It was also encouraging to see US equities brush off news from the latest Fed Beige book, an economic report based on 12 regional banks, which showed widespread signs of a deceleration in the pace of economic growth. Banking stocks had a good day with JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) both gaining at least 1.2% and European stocks rose on improved demand for Portuguese and Polish bonds. Goldman Sachs added 1.6% as KKR and Perella Weinberg Partners were said to be in talks to hire its US proprietary trading group. And Apple (NASDAQ:AAPL) rallied 2% after UBS raised its profit and share-price estimates.

Obama Gets Lost

Today is Rosh Hashanah, the Jewish New Year, in which it is believed the names of the righteous are recorded in the book of life, those in the middle ground are given ten days to repent and become good, while the wicked are deleted from the book of life. In essence, it is make or break time for the year. One wonders if we might be entering a similar phase for Ireland with landmark decisions over the fate of Anglo Irish Bank taken (with the cost of the funeral to be know in early October) and the funding cliff for Irish banks to refund some €25bn of maturing debt this month pending (though I feel fears over their capacity to roll this debt is way overblown).

Stocks catching the eye this Thursday in Europe include Lloyds (NYSE:LYG), which is ahead by 2.5% as Barclays Capital raised its recommendation for the lender to “equal-weight” from “underweight,” saying the risks were now more evenly balanced. Separately, UBS reiterated its “buy” recommendation for Lloyds saying the bank now looks “aggressively recapitalized to a very robust level. Theoretically more than every pound that Lloyds Banking Group now earns is distributable to shareholders,” wrote London-based John-Paul Crutchley in a report to clients. "The non-core rundown will also liberate capital for shareholders.”

And ARM, the UK designer of semiconductors used in Apple’s iPhone, gained 6% after unveiling a new Cortex-A15 MPCore Processor. This “new product announcement is a potential game changer,” wrote Aviate Global analysts in an e-mail to clients today. “It offers five times the performance of today’s best- in-class smartphone processors.” ARM rallied nearly 6% yesterday after analysts at RBS reiterated their “buy” recommendation on the shares after “checks” indicated that ARM had won an order from Samsung Electronics Co. (OTC:SSNLF) for a GPU socket in their latest application processor chip.

But HMV Group (OTC:HMVMF) plunged a full 10% after the music and DVD retailer said sales at outlets open at least a year in the UK and Ireland fell 15% in the 19 weeks ended Sept 4. The retailer also said its finance director, Neil Bright, will leave the company in December to join Holidaybreak Plc.

It's been a better morning for European automakers though with Daimler gaining 2.1%, leading a measure of automakers to the largest increase among 19 industry groups in the Stoxx 600. The company is likely to increase its full-year forecast for earnings before interest and taxes to more than €7 billion from €6 billion currently, Credit Suisse analyst Arndt Ellinghorst wrote in a research note Fiat (FIATY.PK) is better by 2.3% as JPMorgan lifted its recommendation to “neutral” from “underweight” and PSA Peugeot Citroen and Renault (OTC:RNSDF) have rallied 3.6% and 3.1%, respectively.

Today’s Market Moving Stories

  • Figures showed that the July US trade deficit declined more than expected today and reached -$42.8bn. Thus, June’s spurt to $-49.8bn seems to have been a blip in the data. In July, total exports gained M/M 1.8 percent while imports decreased 2.1 percent. As for growth, foreign trade is still set to be a slight drag on GDP in 2010Q3. After all, imports started into Q3 on a very elevated level (and significantly above the 2010Q2 average). However, the drag will be much less than Q2’s -3.4pp.
  • While US initial jobless claims fell 27k to 451k last week. Claims moved sideways since the start of the year (the average since Jan is 466k), indicating that the improvement on the labour market did make scant headway. All in all, after a long spell of weak data, today’s releases offer some respite.
  • In a combative speech, Obama conceded his policies have “fed the perception that Washington is still ignoring the middle class,” was billed as a major economic address to unveil a new round of proposals to kick-start a flagging economic recovery. The president did introduce three new policy proposals the White House has been rolling out for nearly a week: $50 billion in additional infrastructure spending, a permanent and expanded research and experimentation tax credit and a measure allowing businesses to write 100 percent of their investment costs off their taxes through 2011. But Mr. Obama’s speech was far more about politics than economics.
  • ECB chief economist Jurgen Stark tells German MPs that the banking system is insolvent. This led to complete shock because the newspaper headlines from July suggested the opposite. The German policy establishment is under the illusion that its banking system is sound because it passed what turned out to be fraudulent stress test. Jurgen Stark is reported to have told a group of Christian Democrat MPs in Berlin that the German banking sector as a whole is undercapitalised. More controversially, he advised them to privatise the saving banks – the ultimate taboo because the savings banks are consider sacrosanct. FT Deutschland reported that Stark also relayed the assessment of US bankers that the German system could not conceivably survive the introduction of the tougher capital rules of Basel III.
  • Big Banks Start The Revolution

    Japan has no choice but to intervene in currency markets to prevent the yen’s strength from decimating the nation’s industry, Barclays Capital said. The yen reached 83.35 versus the dollar yesterday, the highest since May 1995, threatening Japan’s export-led recovery. Industry and jobs won’t likely return from abroad even if the currency weakens eventually, and that prospect may force policy makers to intervene “in the immediate future,” said Tetsufumi Yamakawa, co-head of Japan research at Barclays. “If the yen’s strength lasts at current levels, factories, investment and jobs will all move overseas,” Yamakawa said at a forum in Tokyo yesterday.

  • Australian job growth exceeded forecasts in August, sending the unemployment rate down to 5.1% and driving the nation’s currency higher on speculation the central bank will resume raising interest rates. Employers added 30,900 workers in August, exceeding the median forecast for 25,000 in a Bloomberg News survey of 25 economists, the statistics bureau said in Sydney today. The jobless rate matched the lowest level since January 2009.

Company / Equity News

  • Home retail issued a second quarter trading update. The group reported a drop in sales of 1.1% at its Homebase division by 1.1% to £396 million, while Argos sales saw a drop of 2.8% to £924m. Argos gross margin declined by 125 bps in the second quarter. Home Retail noted that sales at Homebase beat expectations, while Argos saw improving trends. Overall the company still anticipates a challenging year and as a result expects full-year pretax profit to be at the low end of expectations of £250m – £270m. William Morrison reported first half net profit of £286m compared to analyst expectations of £285m. Revenue of £8.1bn was slightly below consensus of £8.13bn. Morrison increased its dividend by 14% to 1.23p. The group did indicate that it was on track to deliver profit in line with expectations this year, however did note that it expects low market growth in the second half of the year.
  • Tesco (NASDAQ:TESO) remains my preferred play in the UK retail sector due to its lower cost product offering, stable operating margins and international exposure. Another positive for Tesco over the coming years is Tesco Bank that continues to show signs of expansion.
  • BP’s (NYSE:BP) tumultuous rating from Fitch was yesterday upgraded by three notches to A, with a stable outlook, reflecting “an end to the threat of further leaks from the Macondo well.the improved visibility of potential liability scenarios the company could still face and substantial progress that BP has made to date in building up liquidity to address potential financial payments.” Specifically Fitch estimates that BP’s total pending liabilities could range from a low of $35 billion if BP is cleared of gross negligence and receives a lower range fine under the US Clean Water Act that is shared with its partners; to a high of $67.5 billion if BP is guilty of gross negligence, has to pay the Clean Water Act fines in full and does not receive tax relief for the write-off costs of the spill. However even in the high liability scenario, Fitch considers BP to have “adequate financial resources to meet its obligations to a degree that is commensurate with the current credit rating category.” While Fitch’s action is a positive development, it merely brings the rating in line with S&P and Moody’s. Given that it is almost 3 months since S&P and Moody’s downgraded BP and left it on watch negative, some sort of comment is also due from these two agencies, and although the developments have been positive since June, I am not expecting an upgrade in the near future.

  • Separately yesterday, BP published its investigation report on the causes of the Gulf of Mexico tragedy. The report blames “decisions made by multiple companies and work teams.a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces” and identifies some key findings that led to the disaster. While BP does accept some responsibility for the accident, unsurprisingly BP is pointing the finger of blame firmly in the direction of its contractors Halliburton (NYSE:HAL) and Transocean (NYSE:RIG), and the report claims there was nothing wrong with the well design. Transocean and Halliburton will come up with their own version of events, and have already criticized the report. There are also various government investigations ongoing, although this does at least highlight how difficult it will be proving negligence on the part of BP.
  • The equity round up sections of the FT and Daily Telegraph amongst others carried reports that Adecco (OTC:AHEXF), Manpower (NYSE:MAN) and Randstad (separately) were weighing up a 140p to 150p bid for the UK based recruitment group Hays. This would value Hays at just north of £2 billion. Adecco made an unsuccessful bid for Hays in 2008, so renewed interest is not totally out of the question. However, a bid would require a substantial equity slug to enable Adecco to retain investment grade status, which debt funders as well as the Company are likely to require/desire
  • Visa (NYSE:V), the world’s largest payments network, posted the biggest drop in the Standard & Poor’s 500 Index after Bank of America Corp.’s James Kissane became the first analyst to recommend avoiding the shares. “We are among the only skeptics on the networks,” Kissane said today in a note to clients as he cut the shares to “underperform” from “neutral.” That’s typically interpreted as a sell recommendation, the only one among 38 analysts surveyed by Bloomberg. “The pricing power of the networks is likely to be considerably diminished,” he wrote.

  • Shares of several companies that make light-emitting diodes and related equipment slumped Wednesday as fears resurfaced about weakening demand for equipment such as liquid crystal display screens that use the LED bulbs. Shares of LED-maker Cree Inc. (NASDAQ:CREE) closed down 8.1% to $50.18, Veeco Instruments (NASDAQ:VECO) fell 8.3% to $33.44 and Aixtron (AIXG) was 5.3% lower at $24.78. The latter two companies manufacture equipment for building the bulbs. In recent late trading, Cree and Veeco shares are unchanged while Aixtron is down to $24.72. Analysts blamed a combination of poor demand for LEDs and the products that use them, oversupply of the bulbs and a slowdown in the influential Asian LED market for the tumble. Avian Securities LLC’s downgrade of Veeco and Aixtron from positive to neutral was also blamed for the slide. Concerns over demand for LEDs have surfaced before, with shares of Veeco, Aixtron and Cree suffering from a similar bout of weakness last month, following a report by a Taiwanese newspaper that said makers of flat screens were cutting orders to LED makers.
  • There

  • Intel (NASDAQ:INTC) will show off its first chip design that has graphics capabilities built into the processor, stepping up a threat to Advanced Micro Devices Inc. (NASDAQ:AMD) and Nvidia Corp (NASDAQ:NVDA). Chief Executive Officer Paul Otellini will demonstrate the product next week at the Intel Developer Forum in San Francisco, the company said. The design, known as Sandy Bridge, will go into production next quarter and become the basis for Intel’s entire lineup.
  • Google (NASDAQ:GOOG) has unveiled a faster Internet search feature that gives users results as they type in requests. Google Instant saves 2 to 5 seconds per search and will be available today on the Chrome, Firefox, Safari and Internet Explorer 8 browsers in the U.S., Vice President Marissa Mayer said at a press event in San Francisco. A mobile version should be rolling out in the next few months, she said.
  • Dana Petroleum (OTC:DNPXF) has sent an e- mail to Korea National Oil Corp. to say it is still willing to negotiate and agree to a takeover of the Scottish oil explorer, the Financial Times reported, without attribution. Chief Executive Officer Tom Cross sent a letter to KNOC after Dana made a defense of its value and argued it is worth more than KNOC’s 1,800 pence-a-share offer, the FT said.
  • FTSE Group, announced Wednesday that investment firm Resolution, global engineering and manufacturing group Tomkins (TKS) and engineering solutions business Weir Group will be joining the FTSE 100 Index. MAIN FACTS: In the rebalance, Cable and Wireless Worldwide, Home Retail Group and Segro will leave the U.K.’s leading blue chip Index and join the FTSE 250 Index. Companies that will be joining the FTSE 250 Index will be Segro, Home Retail Group, Cable and Wireless Worldwide, Phoenix Group Holdings, Jupiter Fund Management, Ocado Group, Kenmare Resources, and Avis Europe. Companies that will be leaving the FTSE 250 Index will be Resolution, Tomkins, Weir Group, Hansteen Holdings, Gem Diamonds, Eaga, Promethean World, and Game Group. -All changes from this review will be implemented at the close of business September 17 and will take effect from the start of trading on September 20.

Worth a read: Michael Lewis has a field day: Beware of Greeks Bearing Bonds (Vanity Fair)

And finally…

The recession spawns a whole industry in Ireland..making up songs…

Disclosures: None