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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

E.U. Bailout Stock Market Hangover Sets In

Stock-Markets / Stock Markets 2010 May 11, 2010 - 09:49 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleU.S. stocks rallied hard Monday with benchmark indexes advancing the most in more than a year, after European policy makers announced a loan package of almost $1 trillion to contain the sovereign-debt crisis. The VIX, tumbled 30% the biggest drop in its two-decade history. Insurers performed well as they hold bonds tied to banks in Greece and Portugal. Homebuilders were strong after John Paulson estimates a 3%-5% gain in the housing market in 2010 and an 8%-12% in 2011. McDonalds (+3.8%) after a 4.9% increase in April sales helped by growth in Europe and Australia

Today the euphoria is evaporating. Market commentators have taken a closer second look at the package, and they start not to like it. In my view the sentiment was best expressed by what Kevin Gaynor chief markets economist of RBS who called the EU’s strategy “Bailouts rather than integration”. They are not solving the problem, they are throwing money at it. Another appropriate comment came from Marek Belke, the EU head at the IMF, who compared the rescue package to a dose of morphine with the purpose to stabilise the patient. The real hard stuff has yet to happen.

Reports that German ECB keeper of the hawkish flame Axel Weber believes yesterdays bond purchases were a mistake and affirmations from JC Trichet that this decision was not supported by all members of the central banks governing council have helped euro / dollar erase all of its gains this morning. Euro-dollar trades now at 1.2683 off a high of 1.309 yesterday on the news that the Bundesbank voted against the purchase of European government bonds

While the Euro is heading south again and we all keep wrangling our hands on the travails of the noble Europe, other parts of the world keep going minding their own business, and in some quarters that means a lot of business. Data published tonight show the Chinese economy is almost bursting out of its seams. Virtually all figures came on the strong side and ahead of expectations. IP was up 17.8% yoy in April, retail sales were up 18.5%yoy with fixed assets investment in urban assets up 26.1%yoy ytd. The money and credit numbers are almost a cry for further tightening, with M1 up 31.3% and new loans up 774 bn CNY way ahead of expectations.

It is worth noting that China’s equity markets have now lost 20% year-to-date which means it is in bear market territory. Is there any ammunition left for policy makers to bail out the next financial crisis? And has the EU just simply delayed an inevitable day of reckoning that will involve debt restructuring, default and debt monetisation? I think you can guess where I stand on all of this. It is difficult to see how this is constructive for the euro. The ECB has done a U-turn in buying government bonds and in the process has ripped up the rule book as enshrined in the Maastricht Treaty. When push comes to shove, I guess rules are made to be broken. And push has come to shove as the eurozone debt crisis threatened a re-run of the global market meltdown in 2008. Whatever the semantics coming out of Frankfurt, the ECB has adopted quantitative easing (at a time when the Fed is unwinding quantitative easing). This is a recipe for economic slump and deflation.

Missing from all the hoopla surrounding the EU bail-out is the adverse impact that the draconian cuts in eurozone budgets will have on economic growth. Long-term, real money investors will be concerned that debt monetisation just undermines the euro as a store of value and investment currency. So do not be surprised by further weakness in the euro.

UK politics have taken an unexpected twist with the prospect of a Lab-Lib Dem coalition. The Wall Street Journal this morning calls this a “coalition of the absurd”. It is certainly a coalition of losers. I agree with ex-cabinet minister Dr John Reid who was interviewed by Sky TV last night that this simply shows no respect for the voters’ wishes and will backfire on both Labour and the Liberal Democrats. International investors will certainly be puzzled that the mother of parliamentary democracies is behaving in this way. In addition, the risk of a snap election in these circumstances delays any prospect of a credible budget programme being implemented. This can easily unsettle UK markets. So far, sterling is holding up reasonably well against the major currencies, but political uncertainty is always a recipe for unwanted volatility.

UK March manufacturing output shows sharpest monthly rise since February 1987; would raise Q1 GDP growth by 0.1pp in isolation

Today’s Market Moving Stories

•Greece may have its credit rating lowered to junk within the next month, Moody’s Investors Service said, citing the country’s “dismal” economic prospects. “We expect to conclude our review in the coming four weeks,” Moody’s, which currently has the nation’s A3 rating on review for a downgrade, said in a report today. “The migration will most likely be substantial, probably within the Baa range; but an adjustment to below investment grade is also possible.” Greek bonds soared today, with the yield on the government two-year note sliding more than 1,000 basis points to 9.16 percent, after the 16 euro nations agreed to lend as much as 750 billion euros to the region’s most-indebted countries. The European Central Bank said it will counter “severe tensions” in
“certain” markets by purchasing bonds.

•U.S. stocks could jump as much as 20%, led by technology companies, as the global economy rebounds from Europe’s debt crisis, said Barton Biggs. “I’m betting the next move in the U.S. market is going to be up 15 to 20 percent,” Biggs, who runs New York-based hedge fund Traxis Partners LP and whose flagship fund returned three times the industry average last year, said in a Bloomberg Television interview today. “I would just point out that the world is having a strong economic recovery, and so is Europe.” Biggs recommended buying U.S. stocks last year when benchmark indexes sank to the lowest levels since the 1990s. He did not give a timeframe or refer to any specific stock index in his comments today.
•Today’s highlights of the U.S. earnings calendar are due after the close, with Walt Disney (consensus EPS $0.46) and Electronic Arts (consensus EPS $0.05) results and Intel’s analyst meeting scheduled for later.

•The UK RICS housing market survey showed an across-the-board rebound in sentiment in April. The net price balance increased from 9% to 17%, indicating that a greater number of surveyors saw an increase rather than a fall in house prices in the last three months. This reading was comfortably ahead of the consensus expectation of 10%. The new buyer enquiries net balance increased from +1 to +8, the highest reading since last December (this is consistent with reports from the new build sector). Newly agreed sales turned positive for the first time in 2010, rising from -8 to +12. On the supply side, the new vendor instructions net balance fell from +21 to +11, indicating that instructions continued to increase but at a slower pace. Significantly, surveyors have turned far more positive on the outlook for prices and sales activity. The sales expectations net balance increased from +6 to +25, the highest reading since last October. Price expectations moved back into positive territory, with the net balance increasing from -2 to +7.
•BP will make a second attempt to control its leaking oil well in the Gulf of Mexico within a week by putting another containment dome over it, Chief Executive Officer Tony Hayward said. Hayward said in Houston yesterday the implications from the leak for the oil industry may be “pretty severe.” Hearings start today in Washington D.C. and Louisiana into the explosion and sinking of the Deepwater Horizon drilling rig, the source of the spill that’s threatening the Gulf shoreline. BP Plc and contractors Transocean Ltd. and Halliburton Co. are
singling out each other for responsibility after the explosion of the Deepwater Horizon rig in the Gulf of Mexico. “Transocean’s blowout preventer failed to operate,” Lamar McKay, chairman of BP America Inc., said in testimony prepared for a Senate Energy Committee hearing today. Executives representing Transocean, owner of the Deepwater Horizon rig that exploded on April 20, and Halliburton, which provided cement for the oil well, will say BP had the lead decision-making role.
•The trading operations of Goldman Sachs and JPMorgan Chase for the first time made money every single business day in the first quarter, highlighting the boom in Wall Street’s investment banking revenues, the FT reports. The 14 largest global investment banks have reported $78.8bn in Q1 revenues, their best numbers in three years and just 1% shy of the record. Goldman’s trading desk reported profit of at least $25m on each of the quarter’s 63 working days, according to a regulatory filing. The result, following official probes into Goldman’s trading activities, could fuel criticism of its business model. But the proprietary trading units (i.e. trading on their own account) that powered those gains are under increasing threat from Democratic legislation that would target conflicts of interest in the banking industry. The amendment, sponsored by Sen. Levin and Sen. Merkley would bring a Volcker Rule like initiative into the current financial reform legislation.

Company / Equity News

•Samsung plans to invest 23.3 trillion won ($21 billion)by 2020 in new
businesses, including health care, solar cells and display technologies, partly to take advantage of government spending on green industries, the company’s electronics unit said. Samsung, South Korea’s biggest industrial group, aims to spend 5.4 trillion won in batteries for electric vehicles, 8.6 trillion won in light-emitting diodes and 6 trillion won in solar cells, Samsung Electronics Co. said in a statement today, without providing details on its affiliates’ plans.
•Aviva, the U.K.’s second-biggest insurer, said in a statement today that first-quarter total life and pension sales fell 4.6 percent to 9.13 billion pounds.
•Spain’s telecommunications giant, Telefonica said early Tuesday it has launched a EUR5.7 billion cash offer for the 50% stake Portugal Telecom SGPS.SA owns in Brasilcel NV. Brasilcel is an investment vehicle 50-50 owned by both Telefonica and Portugal Telecom and which controls 60% of Brazilian mobile company Vivo Participacoes Telefonica’s offer for Brasilcel, which is binding and is not subject to any type of condition, will expire June 6. As part of its offer, Telefonica said it will launch a separate bid to buy an additional 3.8% of Vivo shares for an extra EUR600 million. The price represents 80% of the value offered to be paid by Telefonica for each Vivo ordinary share owned by Brasilcel. In a separate press release, Portugal Telecom said its board of directors met Monday to discuss Telefonica’s unsolicited offer and decided unanimously to reject it.
•Toshiba plans to spend 2.4 trillion yen ($25.7 billion)on capital investment and research and development over the next three years, Nikkei English News reported, without saying where it got the information. The company intends to have capital spending of 1.3 trillion yen in its 2010 through 2012 fiscal years, while devoting 1.1 trillion yen to research and development, the Nikkei reported. Toshiba, which is scheduled to release its mid- term business plan today at 1:30 p.m. in Tokyo, had no comment on the report, said Keisuke Ohmori, a Tokyo-based spokesman.
•In Ireland Glanbia has raised its FY ’10 eps guidance from 32-33c to about 35c on foot of continued strength in dairy markets, a strong US dollar and progress in its nutritional division. This implies eps growth of up to 15% in the full year. Members of Glanbia Co-op yesterday rejected (by 27% to 73%) a plan to demerge its Irish dairy and agribusiness units and instead will retain their 54% holding (via the co-op) in the plc. The opinion that co-op member support for this deal was a “no brainer” was misplaced. Firstly, the 75% one person one vote is a formidable hurdle for any co-operative to overcome. Secondly, the deal itself was complex and multi-faceted. Farmers have an uncanny ability to distil complex issues in to simpler maxims – if it ain’t broke, don’t fix it !
•United Drug today issued an IMS posting revenues of €853.3m, 2% increase on constant currency basis while PBT was 7% ahead at €25.1 also without the effect of currency. The performance is ahead of expectations and was boosted by growth across all three divisions. The translation of currency impacted profits by €750,000. The Medco JV is said to be progressing well since the formal launch in March with two contracts already secured with major pharmaceuticals. This has the potential to surprise to the upside for the FY results. Cash generation remains healthy with €35m generated in the period (H1 09: €13m) and net debt was reduced by €22.2m to €140m. This has left the BS with gearing of 41% and net debt/EBITDA of just 1.67. Management has also raised the interim dividend by 5% to 2.34c. The groups are looking to grow the business further either organically and through acquisition and full year guidance has been maintained with PBT to be flat on a constant currency basis. The IMS is a strong set of numbers driven by growth across all three divisions with the revenue strength in the healthcare division and health of the balance sheet the main takeaways.
•Danish brewer Carlsberg A/S Tuesday beat expectations by swinging to a first quarter net profit and said it improved overall market share in Northern & Western Europe, Asia and Eastern Europe excluding Russia. “”We are satisfied with the first quarter performance which was in line with our plans and we remain confident in our ability to meet our targets for 2010,” Chief Executive Jorgen Buhl Rasmussen said. The maker of Tuborg, Carlsberg and Kronenbourg beer posted a net profit of 471 million Danish kroner ($80.6 million), after a net loss of DKK212 million a year earlier. Analysts had expected a net loss of DKK110 million. The first quarter is usually the least significant for Carlsberg, as alcohol consumption is lower than during the rest of the year. Operating profit fell to DKK735 million, from DKK788 million a year earlier. Revenue was down 7% to DKK10.97 billion, mainly due to destocking in
Russia. Beer consumption there has increased rapidly in the past few years but the economic downturn coupled with a tax increase has sent beer volumes lower.
•Mail and logistics giant Deutsche Post Tuesday said first-quarter net profit soared due to accounting changes and tight cost control, and confirmed its 2010 outlook. The company still expects earnings before interest and tax this year to rise to between EUR1.6 billion and EUR1.9 billion, but at the upper end of the range. It expects net profit to rise on the year, in step with its operating business and repeated the positive trend is likely to continue in 2011.
•Fertilizer and salt supplier K+S AG Tuesday said first-quarter operating
profit and sales beat analysts’ estimates, driven by de-icing salt sales and the contribution from Morton Salt, and lifted its forecast for fertilizer sales this year. Adjusted earnings before interest and taxes, or Ebit, which the company refers to as operating earnings, grew 54% to EUR268 million from EUR174 million a year earlier. Analysts had expected adjusted Ebit of EUR240 million

Disclosures = None

By The Mole

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

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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