Are We Set For Stock Market Turnaround Tuesday?

By: PaddyPowerTrader

US stocks rose Monday, with the Dow dramatically reversing a 184-point drop, as a rise in the US homebuilders NAHB index and the euro’s rebound from a four-year low bolstered optimism. Sprint Nextel climbed 3% to help lead telephone companies to the biggest gain among 10 groups after saying “steep” revenue declines have ended. GLG Partners rallied 50% as Man Group agreed to buy the hedge-fund firm for $1.6 billion.

Overnight EUR/USD started going down the slope again in the Asian session, possibly triggered by the overnight news on the US Senate passing a proposal to block IMF loans to foreign governments that aren’t expected to be repaid. While the general tone in the risk market remained depressed in the absence of any positive news to celebrate, the pace of sell off in risk markets at least seems to have calmed down a little compared to yesterday.

Today (will it be turnaround Tuesday?) US stock futures have swung around to positive on better than expected profit numbers from bellweather retailers Walmart, Saks and Home Depot, though Walmart did urge caution with its conservative forecast of Q2 EPS of 93-98 cents as they described a “continuing challenging sales environment”. Datawise we’ve had a confusing picture painted by a surge in US housing starts to an 18 month high but a fresh plunge in building permits casting doubt on the momentum in any housing recovery.

Today’s Market Moving Stories

•The US government’s efforts to help homeowners stay in their properties hasn’t actually worked out as planned – the WSJ reports that a quarter of those assisted by the scheme have actually keen kicked out subsequently. It said one in four have been weeded out of the scheme because they failed to make the new modified payments or just simply didn’t have all the documentation in the first place. The trouble is, all this leaves homeowners potentially worse off than they were before. Attempts to keep up with modified payment plans exhaust savings, but then when the homeowner is ultimately unable to maintain payments they are foreclosed on anyway, but with no savings left to fall back on.
•The San Francisco Fed’s take on the recovery was that it should be stronger than the climbs out of the last two recessions. It predicted GDP growth of 4% this year and then 3.5% next year – on the face of it a very quick return to trend pace. However, the SF Fed said these numbers weren’t sufficient to really be able to claim a V-shape recovery, such was the extent of the downturn. Note – although the figures look pretty punchy, it’s always worth bearing in mind the comments of BoE governor King a year ago. It’s the level of GDP rather than the pace of GDP that really counts.
•Eurozone finance ministers met late Monday, with participants reporting that most of the discussion was technical in nature – dealing with the last few details of the Stabilisation scheme. German finance minister Schaeuble said further progress was made on the SPV (worrying that the EU launched the scheme without fully understanding how it would work). The chair of the Eurogroup, Juncker said the Eurozone is now ready to disburse the initial tranche of loans to Greece. He added that Greek budget plans were “on the right track.” Odd comment from Juncker though – there is no intention of interfering in budget policies in member states (surely, given the pressure applied to Greece, that cannot be true). Interesting to see Juncker reporting that the group is to examine the effect of budget cuts on growth – the potential for some balking at the measures proposed.
•Note that the meeting expands to the full EU membership today, with the issue of hedge fund regulation topping the agenda. This will be the first meeting attended by UK Chancellor Osborne. His position will be extremely difficult as the EU ministers are keen to clamp down on the abilities of the hedge funds, but the UK, with the concentration of hedge fund business in Europe (around 80%) is much less keen to damage one of its cash lines.
•Today the German ZEW growth expectations were down substantially from 53.0 to 45.8 (consensus: 47.0) in May. It was the seventh decline in eight months. In contrast, the current situation component improved further from -39.2 to -21.6. The ZEW survey underscores that harsh austerity measures in other EMU economies and lingering concerns on the future of the EMU weigh on the German growth outlook.
•EMU HICP for April came in at 1.5% this morning. The bottom line is that on the one hand, core price pressures are slowing and will continue to do so probably for another year or so, in response to economic slack and the recently announced step up in fiscal tightening in some peripheral countries. On the other hand, a weaker EUR/USD exchange rate implies higher non-core pressures which, however, for the time being are visible only on energy, while leading indicators for food inflation remain at relatively low levels.
•But UK headline and core inflation both 0.2% stronger than forecast (headline 3.7% from 3.4% in March). BoE governor King will be now forced to write another letter of explanation to the Chancellor – the view remains the same, spare capacity will bring inflation down. For once (and rightly) GBP is sold on strong inflation. The market has tended to regard persistent upside surprises in inflation in recent months as a cue to buy GBP on a naive interpretation of what this might mean for nominal interest rates. However, today’s price action suggest that the market is coming around to a more sensible view that high inflation is a currency negative when set against the second most highly indebted private sector in the world (after Spain) and with a government starting to tighten fiscal policy.
•The Reuters Tankan’s headline index of Japanese manufacturing sentiment rose to +4 in May from 0 – the first positive figure in two years. A Cabinet Office index of consumer sentiment also hit a 2-½ year high in April – the index rising to 42.0 from 40.9.
•Back in Europe this morning Ireland’s NTMA successfully sold a further €1.5 billion of 5 and 10 year government bonds. The auction was 3 times oversubscribed and more crucially means that the NTMA have now raised 66% of the total borrowing requirement for the full year 2010. This is far and away the highest proportion of any Euro area sovereign and clears the way for Irish financials to return to the market to raise much needed capital.
•In related news the various Euro area central banks were back buying the various peripheral PIGS government bonds this morning. They also conducted a “sterilization” exercise i.e. to drain the monies injected to appease the furrowed brow of Germanic members of the ECB governing council such as Weber and Stark who are known to be deeply unhappy with this new initiative as they view it as potentially an inflation hazard.

FDIC In Further Trouble
The US FDIC (Federal Deposit Insurance Corp) promoted itself heavily at the beginning of the crisis, with Shelia Bair putting her agency forward for almost every problem going. Bank nationalisations, suggestions for bank breakups, running the good bank/bad bank program and so on. The irony was that so great was the crisis that it struggled with its primary objective of providing deposit insurance. It’s down to the last $5bn or so. Now the FDIC has a new problem – the CDOs it took over from small failed banks are now sat on its own books and are essentially worthless. The WSJ reports the FDIC has inherited more than 250 CDOs (and rising), which are highly toxic and next to impossible to shift off its books. In other words the FDIC finds itself in exactly the same position as the banks it’s been trying to assist. Perhaps as interesting as the issues the FDIC is grappling with is the underlying story – Riverside National Bank of Florida, a community banks and a minnow in the scheme of things, passed 27 CDOs to the FDIC and doubled the notional value of the CDO portfolio held by the agency. The WSJ reported: “The agency hopes to auction off any CDOs that have value this summer. If it can’t unload them, the FDIC could be forced to write off their value, saddling taxpayers with the losses.”

Company News

•After Lowe’s disappointing numbers yesterday, arch rival Home Depot today surprised the market with Q1 EPS that was 5 cents better than analyst’s expectations with profits up 41%. They also raised their full year 2010 outlook.
•Other US stocks in the news in the world’s largest maker of scientific testing equipment, Agilent which increased it EPS forecast by 5 cents to $1.75 for 2010 and Beazer Homes (up 4.5% pre market) after being raised to a “buy” from a “hold” over at Citibank.
•Back in Ireland, DCC has reported FY10 results for the year ended 31 March 2010 with operating profit of €192.8m coming in ahead of our forecast at €187.8m. EPS of 177.98c was 4% ahead of broker’s 171c expectation. The final dividend has been raised by 10% which represents an increase on the 5% paid at interim stage and puts the full year increase at 8.2%.
•British Land released a good set of FY results, reporting IFRS Profit Before Tax of £1,128 against a loss of £3.9bn last year, reflecting the rebound in the UK property market. The average lease length (to first break/expiry) remained at 13 years, significantly higher than the 10 year average. Management stated that they were encouraged by the recovery of tenant demand in the London office market, but they remained cautious given the fragility of the economic recovery and the prospect of fiscal actions by the new UK Government. The stock is up 3.5% today.
•Glencore reported good Q1 numbers with Q1 EBITDA of $1,389m, up 92% relative to Q1 09 and a more modest 7% increase on Q4 09, reflecting the improved conditions for the global economy, with Glencore’s industrial assets showing the most dramatic improvement on the back of higher copper, nickel and zinc prices as well as increased production. The miners have suffered recently on the back of jittery markets, but with Glencore’s financial position continuing to improve meaningfully, and an IPO in the pipeline. (I view any Xstrata merger as a very long game.) Glencore remains a better way to play this sector.
•Export sales by some of Germany’s biggest companies, including Bayer and BMW, are benefitting from the weaker euro. The currency’s recent drop is, however, pushing up the prices of some commodity imports, potentially hurting sales of steelmaker Kloeckner.
•British Airways averted 20 days of cabin crew strikes after the High Court ruled that the Unite union did not properly inform members about the results of a ballot on the action. But BA warned that the emergency injunction could not undo disruption for some who were due to travel in the early days of the walkout. The airline hopes to restore a full schedule at Heathrow from the weekend. BA is ahead by 2.5% today.
•To the downside today we have serviced offices provider Regus (off 12%) after surprising the market with comment that the improvement seen in Q1 “had lost some momentum” and yellow pages publisher Yell (down 17%) on announcing that key executives CFO John Davis is stepping down and CEO John Condron is retiring no later than May 2011.
•John Paulson, the hedge-fund manager who amassed a fortune by betting against US mortgage markets, was among 56 investment groups that added at least 5 million shares in Bank of America during the first quarter. Paulson’s company has also taken a 9.1% stake in the MGM Mirage casino group.

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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