Stock Markets Focus On Corporate Earnings

By: PaddyPowerTrader

US stocks advanced Friday, extending the Dow’s longest weekly winning streak in six years. American Express advanced 2.7% on earnings that beat analysts’ estimates, and Merck surged 5% as the drugmaker said the US health-care overhaul won’t hurt long-term growth. Energy companies rallied as the EUR/USD strengthened for the first time in seven days.

For the most part markets have traded positively since I last wrote. In Europe, markets are now looking forward to the day that Greece no longer dominates the news headlines. On Friday the troubled country formally requested that the EU/IMF aid package be activated. The various EU governments must now go through the motions of seeking approvals for the loans that will be forthcoming (in some cases with parliamentary votes). But significant implementation risks are rearing their ugly head (the main risk is that one or more countries fail to gain approval, thus reducing the amount of aid on offer and perhaps having some knock-on effects on the IMF’s willingness to disburse its share of the aid). All parties will wish to expedite the process by 19 May – the date of Greece’s next large bond redemption.

I saw nothing especially interesting in the communiqué following the latest G-20 finance ministers meeting although the meeting did appear to throw up some disagreement about the worth of implementing a bank tax (prompting IMF Managing Director Dominique Strauss-Kahn to describe those opposing the tax as “short-sighted”). As far as the economy is concerned, the G-20 finance ministers observed “The global recovery has progressed better than previously anticipated…” and “…We should all elaborate credible exit strategies from extraordinary macroeconomic and financial support measures that are tailored to individual country circumstances while taking into account any spillovers”.

Today’s Market Moving Stories

•In China Zhou Qiren, a newly appointed academic member of the PBOC’s monetary policy committee said that “in order to defend the exchange rate, the central bank has to buy foreign exchange flowing into China every day … That leads to an excessive supply of base money, and that has been a problem for China since 2003 … You can’t ask central bank to look after both price stability and exchange rate stability – there should be a distinction between the two … China’s central bank is not only the lender of last resort but also the ultimate buyer of foreign exchange. It is paying the highest price to maintain so-called exchange rate stability”.
•US Commerce Secretary Gary Locke states that his department needs more time to decide whether it can launch an investigation into whether China’s currency practices are a subsidy under US trade law. He said that “it’s very, very complex and we need to look at it further” adding he did know exactly how long it would be before a decision is made.
•A British Chambers of Commerce survey shows that 65% of 300 companies polled were either “concerned” or “very concerned” about the impact a hung parliament would have on their business.
•Hometrack reports that UK house prices rose by an annual 1.8% in April, their fastest pace of increase since January 2008. However, Hometrack said that the supply of property coming on to the market rose by 3.7%, outstripping a 1.0% increase in new buyers registering with agents.
•Federal Deposit Insurance Corp Chairman Sheila Bair said the number of US bank failures will fall below the agency’s earlier estimates. “Some of the banks we thought would fail have actually raised capital and they’ve come off of our list” of so-called problem lenders, Bair said. Bank failures “will peak toward the end of this year”. The FDIC had 702 lenders on its problem list at the end of 2009. Fifty lenders have been shuttered this year, bringing total failures to 215 since the start of 2008.
•Fabrice Tourre, the Goldman Sachs executive director facing a fraud lawsuit in the sale of a mortgage-linked investment, said an index that facilitated derivatives trading in the market was “like Frankenstein.” The so-called ABX index is “the type of thing which you invent telling yourself: ‘Well, what if we created a ‘thing,’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’” Tourre said in a Jan 29 2007 email released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”

Acropolis Now As Germany Drags Its Feet On Greek Aid

While Greece finally blinked and ceded fiscal authority to the IMF Friday, Germany continues to prevaricate, posture and play hardball and the bond vigilantes are again today battering the PIIGS bond yields screaming “show me the money”. This has the potential to go badly wrong – opposition in Germany to the bail out plan is rising with a poll saying 86% of Germans are opposed to the package. The CSU, junior coalition partner in Merkel’s government, wants Greece to leave the Eurozone. Also the Social Democrats have rejected fast-track legislation, which means that Germany’s contribution, if it comes at all, would be delayed. Wolfgang Munchau in the FT says this is going to be the most important week in the history of the Eurozone. The best and easy English language review of the situation stands on Der Spiegel. http://www.spiegel.de/international/europe/0,1518,691168,00.html

Breaking News. Germany’s Angela Merkel on Greece

•Merkel: German agreement on greek aid may take few more days
•Merkel says Greece must accept ‘tough’ conditions for years
•Merkel says germany wants ’sustainable’ greek plan
•Merkel says germany has big obligation to ensure stable euro
•Merkel says Germany will help greece if preconditions met
•Germany’s merkel speaks on greece rescue package
•Merkel says Greece must show it’s on path to sustainable budget
Pretty much what you’d expect. Possibly slightly disappointing that the aid is not there right now, but we’ve known the approval had to be sought from their parliament and she cannot pre-empt that process. Looks like they will cloak their efforts to help Greece in the shroud of maintaining a stable Euro. Given public opinion in Germany that looks sensible to me.

Hung Government Still The Most Likely Outcome
Dave Prentis, general secretary of Unison, states that “the next government will face the biggest wave of militancy since the 1980s if it tries to force through hundreds of thousands of job cuts”. But according to an analysis by the FT, “the next government will have to cut public sector pay, freeze benefits, slash jobs, abolish a range of welfare entitlements and take the axe to programmes such as school building and road maintenance – or make a set of equally politically perilous choices”… “if further big tax rises are to be avoided as the next chancellor seeks, at a minimum, to halve the deficit by 2014 – a goal to which all the main parties are signed up”.

Three opinion polls commissioned by Sunday newspapers show that the Conservative Party are maintaining a lead that remains insufficient to avoid a hung parliament. A poll by ICM for the Sunday Telegraph newspaper gave the Conservative Party 35%, Liberal Democrats 31% and Labour 26%. That ranking was replicated in a ComRes poll for the Independent on Sunday and the Sunday Mirror newspapers. Two of the polls show the Liberal Democrats in second place.

Company News

•With 157 of the S&P 500 companies having reported (46% of market cap), this is shaping up as the best earnings season on record. A record share of companies are beating forecasts. On a dollar-weighted basis, reported earnings are 17.7% ahead of expectations – which, if maintained for the entire season, would also be a record. Financials are the main driver, beating expectations by 70%. Ex-financials, reported earnings are 7.1% higher than expected. Underscoring the primacy of earnings, sector performance over the past three months is almost perfectly correlated to forecast revisions. The only exception is IT, which we see as very over-owned, and has under-performed relative to solid upgrades.
•Stocks on the move today include Chloride Group, jumping 43% after Emerson Electric’s renewed its offer for Britain’s largest maker of backup power equipment.
•Cookson Group rallied 6.5% the world’s biggest maker of ceramic linings for metal smelters forecasted a rise in first-half profit of as much as 20%.
•SatNav maker TomTom advanced 8.2% after the company posted first-quarter net income of €2.9 million, beating the average estimate of a loss of €8.4 million.
•Carphone Warehouse is ahead by 3.7% today. The company raised its forecasts for the third time in six months as it sold more smartphones in the US and Europe. Earnings before interest and taxes at the Carphone Warehouse Europe unit will rise 15% – 20% in the year ending March 2011, the company said today. Carphone expects the same rate of profit growth from the Best Buy Mobile unit.
•UK Coal sank 1.3% after posting a wider full-year loss as production and prices declined. The net loss was £27.5 million, compared with a loss of £15.7 million a year earlier.
•Caterpillar is up 3% pre market after a bullish trading statement showing they’d swung into profit in Q1 2010 (EPS 36c). They also raised guidance for the full year.
•But shares in Citigroup are weaker on news that the US Treasury is seeking to lighten up their holdings.
•E.ON, the energy supplier that’s selling assets to cut debt, is still considering bids for its US utility business worth at least €4 billion. Duke Energy is among the potential buyers for the unit previously known as LG&E.
•UAL’s United Airlines and Continental Airlines are at odds over how to value their planned no-premium stock merger, with negotiations focused on what time period to use for the stock-swap ratio. Continental prefers a ratio based on stock prices before April 7. United, whose stock has outperformed Continental’s since then, is pushing for a later date, they said.
•Redrow today released an IMS reaffirming the recent positive news flow from the UK housing sector. Recent trading has seen sales “comfortably ahead” of the same period last year, with further stability seen in pricing across the UK. Redrow have also announced plans to increase the number of sales outlets from 72 during throughout the year to accommodate the change in company focus to increase numbers of one off housing.
•The Sunday Telegraph reported that ITV is mulling a bid for Channel Five, whose owner RTL (owned by Bertelsmann) is a willing seller. With new ITV CEO Adam Crozier starting today, bid talk is maybe a little premature, but would be attractive to both parties with RTL taking a minority position in ITV as part of the deal. The main hurdle will be competition authorities – the combined group would have 53% of the TV advertising market. If this can be overcome a transaction is likely at some point.

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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