Report From Europe: A Diluted Dose of Basel III Cheers Stocks

Includes: DIA, QQQ, SPY
by: The Mole

US stocks pared gains Friday after former Federal Reserve Chairman Paul Volcker said the US and European economies may take years to recover from the recession. The S&P 500 Index rose 0.2% in New York, paring earlier gains of as much as 0.6% after wholesale inventories rose more than forecast and oil climbed to near a three-week high. Chevron Corp. (NYSE:CVX) and Halliburton (NYSE:HAL) both rose at least 1.9% as crude oil gained the most in six weeks. Moody’s Corp. (NYSE:MCO) jumped 5.9% after Piper Jaffray & Co. raised its rating on the stock. National Semiconductor Corp. (NYSE:NSM) slumped 6.4% after forecasting sales that missed analysts’ estimates. Dell Inc. (NASDAQ:DELL) and Adobe Systems Inc. (NASDAQ:ADBE) sank at least 2% after Morgan Stanley cut its recommendations for the shares. Thinking Outside The Box

The newswire this morning is dominated by the Basel III deal – seen somewhat sweeter than feared. This, along with the better Chinese growth news on Saturday, has supported a risk-on mode in Asian hours. But the weekend news, I find on closer inspection, is actually more balanced than the Basel/China barrage this morning would suggest. The IMF G20 report is said to warn that downside risks to growth have intensified, with deflation being a pertinent risk in advanced economies. A WSJ article– supported by OECD research – demonstrates that the European stress test patently failed to deliver a faithful picture of bank risk. Increased State support to Germany’s failed Hypo, as well as imminent capital raising by Deutsche Bank, are also threats to bank stocks. Deutsche Bank admittedly needs to fund the Postbank investment, but it will be interesting to see whether other banks follow through and also try to raise capital this autumn. Also note that the EU on Wednesday will announce new proposals to regulate OTC derivatives markets. So heavy focus on banks, following a buoyant reopening last week of the EUR primary financial debt market.

Today’s Market Moving Stories

  • China: August CPI rises 3.5 percent y/y. This compares to forecasts of a 3.5 percent increase and a 3.3 percent rise in July. PPI gains 4.3 percent y/y (forecast +4.5 percent ), down from 4.8 percent . Industrial production grows 13.9 percent y/y, up from 13.4 percent previously (forecast 13.0 percent). Retail sales jump 18.4 percent y/y (forecast 18.0 percent) against 17.9 percent previously. Li Daokui, a professor at Tsinghua University and an academic adviser on the PBOC’s monetary policy committee, says that a slight rise in interest rates is worth considering. He adds: “In my view, the main issue is not by how much. It is a minor adjustment that will give the public and savers an expectation, an assumption — which is that interest rates on savings will rise along with the pace of price rises.”
  • The EU Commission has revised its growth forecast for EMU in 2010 to 1.7 percent from 0.9 percent previously, with the forecast for German GDP revised higher to 3.4 percent for 2010 from 0.9 percent previously.
  • The German manufacturers’ organisation VDMA has increased its forecasts for machine tool production in 2010 to 6 percent above 2009 level, up from its previous forecast of 3 percent growth.
  • A report by BDO suggests that the UK is heading for a double dip recession after an ‘optimism’ index, which tracks how businesses expect trading to develop two quarters ahead, fell to 93.1 in Aug from 95.5 – a level the BDO said has not seen since the deepest part of the recession between Nov 2008-Jul 2009
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  • And if someone thinks Anglo Irish looks bad – then look at Depfa, aka Hypo Real Estate (OTC:HREHY). Hypo Real Estate Holding, the lender whose 2009 implosion was Germany’s biggest bank failure since World War II, is to get another 40 billion euros ($50.9 billion) of state guarantees to safeguard restructuring efforts. The infusion will swell government guarantees to the Munich-based lender to €142 billion, Germany’s Soffin bank- rescue fund said a statement. For those who don’t know the background for Depfa, then the story is roughly like this – as a AAA issuer Depfa could issue bonds at Euribor minus 10-25bp and for the proceeds Depfa decided to invest in many different lower rated investments that traded Euribor positive – creating an (in theory) infinity positive cash flow – the big mistake they made, was to invest loads of money in bonds at a very narrow credit spread in many very illiquid securities – Depfa hold lots of longer dated BTPS and Greek Government Bonds – but these two assets are some of the “safe haven” in the Depfa portfolio – the remainder of the portfolio is many different issues without any functioning secondary market.
  • Hiding Europe’s Unpleasant Details. The OECD paper, penned by Adrian Blundell-Wignall and Patrick Slovik, provides a useful accounting of just how much the stress tests ignored. The banking books contain more than €1.6 trillion in EU government bonds, compared to only €336 billion on the trading books, for a grand total of more than €1.9 trillion. Using the stress tests’ own worst-case scenario, the authors estimate that banks’ total losses would be €165 billion, compared to the stress tests’ estimate of only €26 billion.
  • Greece’s PM Papandreou said that the govt is *not even discussing* the possibility of debt restructuring, given that any such move would be “catastrophic” for the economy and would lead to the collapse of domestic banking system. ECB Bini Smaghi said Greece’s debt problem is also Greece’s biggest incentive to remain within the Eurozone. He described as “absurd” (that world again, a favourite of ECB policymakers) the idea that Greece could exit the euro noting that, were it to happen, “partial default or restructuring would in that case be unavoidable”. IMF said it would immediately disburse another €2.57 billion in bailout loans to Greece on the grounds that, by the end of June, “all quantitative performance criteria” were met and “major structural reforms are ahead of schedule”. June was long time ago though and PM Papandreou admitted over weekend that revenue collection is €1.5 billion below targets – the next tranche due in Q4 may not be as easily released. Watch this carefully.
  • The global economy may not generate much employment growth in coming years, with Europe most at risk of a sluggish and jobless recovery, International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview. “The recovery is not enough, you need to have a recovery with jobs,” Strauss-Kahn told Bloomberg Television yesterday in Oslo. “The worst thing to do would be to believe that because we escaped — at the edge of the cliff — the big crisis that could have happened 1 1/2 years ago, we are safe. We’re not safe yet.” IMF chief economist Olivier Blanchard last week warned that joblessness in the US, Europe and elsewhere will likely linger for months. The Organization for Economic Cooperation and Development said policy makers may need to extend or bolster stimulus programs as growth proves slower than projected.

A Key Ahead Week for Austerity Britain

UK Union Leaders meet today in Manchester for week-long annual conf. Rhetoric levels rising over weekend as delegates gather – UK Times picks up the story saying union bosses already calling for mass demonstrations, civil disobedience, and invoking memories of resistance to poll tax under Thatcher.
Date to watch: Oct 20 when Chancellor Osbourne publishes Comprehensive Spending Review detailing cuts to be made over lifetime of parliament. Still unknown which cuts will take effect immediately, but likely some will be delayed until April. Doesn’t matter though – all the negative press already feeding through to weaker economic indicators. PMIs were terrible the week before last. House prices already falling with press claiming desperate sellers are flooding market with supply, anticipating a shortage of buyers in years to come. Watch RICS data due 23:01 GMT tonight.

Predicting a long road ahead before the U.S. financial system is fully healed, former Federal Reserve Chairman Paul Volcker told attendees at an economic roundtable that proposed higher capital standards for banks wouldn’t be enough to fix structural problems. “When a bank goes bad it doesn’t make much difference how much capital it has,” Volcker said in remarks at the Changing Fortunes economic roundtable in Calgary. He added, however, that he hoped the higher capital rules under discussion by international banking regulators this weekend in Basel, Switzerland, would improve the stability of banks. Volcker, Obama’s Economic Recovery Advisory Board, said the problem of “too big to fail” banks still hadn’t been solved, and suggested that “there should be some rules … maintaining some separation between the central commercial banks and trading activity, proprietary activity in the financial markets.” The so-called Volcker Rule in the Dodd-Frank financial overhaul law is aimed at limiting commercial banks’ ability to make trades and other financial deals for their own benefit, rather than for clients. Laws in the US against combining commercial banking and investment banking and proprietary trading activity were repealed in 1999 as part of the deregulation of the financial system. Volcker predicted that a full reform of the US and world financial systems was a “tremendous job” that would take between three to six years to complete.

Company / Equity News

  • Polish cement sales increased by 12.6% in August compared to the same month last year, according to data from the Polish Cement Association. This brings the year-to-date decline to just 1.2%, reflecting the weak first quarter. Shares in CRH have jumped 38c to €13.56 on the news this morning, brush off a broker downgrade from Credit Suisse who cut the stock to “neutral” from “outperform.”
  • Origin Enterprises (71.4pc owned by ARYZTA), along with private equity concern Cap Vest Limited, has entered an agreement to create Valeo Foods Group – a vehicle designed to consolidate Irish consumer food brands. The new entity will acquire Origin’s food division, excluding the Mars Ireland distribution activities – the contract for which is due to cease. Origin will have a 45 percent shareholding in Valeo Foods Group and will be accounted for as an associate undertaking.
  • Following the successful completion of the disposal of AIB’s (AIB) Polish business to Santander (STD), attention will move to the future of its two remaining key assets for sale, in M&T (NYSE:MTB) and its UK business. This morning the Polish press reports that the local regulator is expected to examine Bank Zachodni, although it is not certain how long this process will take. The sale for €3.1billion marks the first significant move in AIB’s fund raising program, with the target of raising €7.4billion of capital by year end. The deal will see AIB generate €2.5 billion of equity tier one capital. Separately, it has been reported in the Sunday Time, that AIB is quietly seeking to raise €600 million in capital in what is called “below the radar” deals. The 22 percent stake in M&T is worth around €1 billion in capital, while the sale of the UK business would also generate €1billion capital to benefit the bank.
  • Tullow (OTCPK:TUWOY) have announced this morning that the Owo-1 exploration sidetrack in the Deepwater Tano licence offshore Ghana has significantly extended the column of high quality light oil discovered by the Owo-1 well. Results of drilling, wireline logs and samples of reservoir fluids confirm that Owo is a major new oil field. Pressure data indicates that this oil pay is in communication with the reservoirs penetrated in the Owo-1 well and confirms at least 69 metres of total net oil pay in a substantial gross oil column of 200 metres. The exploration director, Angus McCoss said in the statement “The discovery of very material volumes of light oil in Owo and the fact that the oil is concentrated in high quality channel sands greatly enhances our outlook for the efficient future development of both the Owo and Tweneboa fields.” On completion of operations, the rig will remain in the Deepwater Tano block to drill the Onyina-1 exploration well which targets a large Campanian prospect between the Tweneboa and Jubilee fields.
  • Associated British Foods (OTCPK:ASBFY) fell 2.1% today, the biggest drop in almost seven weeks after the company reported slowing sales growth at its Primark discount clothing chain in the second half of the year.
  • Car rental firm Dollar Thrifty (NYSE:DTG) has gained 3.6% in Germany. Hertz (NYSE:HTZ) offered $43.60 and 0.6366 of a Hertz share for each stock held in Dollar Thrifty. The offer is equal to $50 a share and management of the Tulsa, Oklahoma-based company agreed to the new offer. Avis (NASDAQ:CAR) offered $1.36 billion for Dollar Thrifty on Sept. 2.
  • Drug maker AstraZeneca (NYSE:AZN) and University College London are set to announce today a three-year partnership to develop a treatment for eyesight damaged by diabetes, using the regenerative capacity of stem cells, the Guardian reported.
  • Bloomberg reports that BAE Systems (OTCPK:BAESY), Europe’s largest defence company is seeking buyers for assets in North America that control systems for aircraft and vehicles and could fetch about $2 billion.
  • Enterprise Inns, the U.K.’s second-biggest pub owner may raise £100 million by stepping up sales of its properties, the Sunday Times reported, without saying where it got the information. The shares declined 2.2% Monday.
  • ITV Plc, the U.K.’s biggest commercial broadcaster is preparing to cut as many as 3,000 staff to make savings and create room for new talent, the Independent on Sunday said, without saying where it got the information.
  • Vodafone (NASDAQ:VOD), the world’s biggest mobile- phone operator is planning to sell its stake in Paris-based mobile-phone business SFR as it cuts the number of minority interests it holds, the Sunday Times said.
  • Deutsche Bank (NYSE:DB), Germany’s largest bank, plans to raise at least €9.8 billion in its biggest-ever share sale to take over Deutsche Postbank AG (OTC:DEUPF) and meet stricter capital rules. Deutsche Bank expects to offer between €24 and €25 a share in cash to Postbank stockholders to increase its 29.95% stake in the lender, the Frankfurt-based bank said yesterday. The company intends to book a charge of about €2.4 billion in the third quarter as it marks down the value of its existing Postbank holding. Chief Executive Officer Josef Ackermann is planning the biggest rights offer in Europe this year as he seeks to reduce Deutsche Bank’s dependence on investment banking by gaining control of Postbank, a consumer lender based in Bonn. The capital increase will also help Deutsche Bank meet new rules from global regulators that more than doubled banks’ capital ratios. Deutsche Bank said the offer is fully underwritten at a preliminary subscription price of 31.80 euros a share by a group of banks including UBS AG, Banco Santander SA, Bank of America Merrill Lynch, Commerzbank AG, HSBC Trinkaus & Burkhardt AG, ING Groep NV, Morgan Stanley and Societe Generale SA. The bank plans to publish a prospectus on the sale Sept. 21. Deutsche Bank expects to issue 308.6 million new shares in Germany and the U.S., it said. Shareholders will be able to purchase one new share for every two they own.
  • The U.K.’s banking industry has warned that new rules aiming to make the financial system more stable spell the end of cheap loans and mortgages, U.K. newspaper The Times’ reported on its website on Sunday. Banks worldwide will be forced to bolster their capital buffers dramatically after regulators reached a landmark agreement, The Times said. Central bankers and financial watchdogs from the 27 member countries of the Basel Committee on Banking Supervision agreed to ratchet up safety standards in an attempt to prevent a repeat of the meltdown that crippled the world economy in 2008-09, The Times said. The deal will effectively push banks’ key minimum capital cushions from 2 percent of their assets to 7 percent, The Times said. Angela Knight, chief executive of the British Bankers’ Association, said to The Times: “The liquidity requirements are significant, as these feed through to the price and the availability of lending. A bank is like any other business–if its fixed operating costs go up, then so does the price of its product. “All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit–the price the borrower pays for money–will rise. The cheap money era is over.”
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  • A group of Chinese investors is in the “early stages” of considering a bid for Prudential Plc (NYSE:PUK), the Sunday Times reported, without stating how it got the information. The investors were among the backers of Prudential’s failed $35 billion bid for AIA Group Ltd., American International Group Inc.’s Asian arm, and would retain only Prudential’s Asian business. Guo Guangchang, chairman of China’s Fosun International Ltd., was among those backing Prudential’s bid for AIA, as were Fred Hu, the former chairman of Goldman Sachs Group Inc. in China, and Shan Weijian, head of Pacific Alliance Group Ltd, the paper said.
  • Hewlett-Packard (NYSE:HPQ) is close to an agreement to buy security software maker ArcSight Inc. for about $1.5 billion, the Wall Street Journal reporting, citing sources it did not identify.
  • The biggest rally in coffee in five years may be ending as the prospect of larger harvests spurs hedge funds to pare bets on higher prices, potentially cutting costs for J.M. Smucker Co. (NYSE:SJM), Kraft Foods Inc. (KFT) and Starbucks Corp (NASDAQ:SBUX). Supplies of arabica, the world’s most-grown coffee, will exceed demand by 6.67 million 60-kilogram bags in the year ending in September 2011, according to ABN Amro Bank NV and VM Group. That’s the most in nine years and more than six times this season’s expected surplus. Speculators including hedge funds cut their net-long position, or bets on higher prices, by 8.4 percent since Aug. 17, regulatory data show.
  • Airbus is in talks with Chinese authorities and companies for an order for 150 planes worth $16 billion at catalogue prices, French daily La Tribune reported, citing unidentified people. The contract would at a minimum include a firm order for 150 planes, comprising 120 A320s, 20 A330s and 10 A350s, according to La Tribune. The firm order could be for more than 200 planes, to which options on more planes might be added, La Tribune said. An agreement may be announced in November when Chinese President Hu Jintao visits France, the newspaper said.
  • The WSJ reports that the U.S. government is on the brink of an agreement over a massive arms sale to Saudi Arabia that the administration claims will create 75,000 jobs. The sale would involve products from companies like Boeing (NYSE:BA), Raytheon (NYSE:RTN), and Lockheed Martin (NYSE:LMT).

Worth a look: A 1946 US Govt info film about Ireland indeed the whole site is fascinating

And finally….

Banned from youtube rants…Uncle Adolf & Eva take to the LUAS

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