Economic Recovery Green Shoots Doused with Herbicide

By: PaddyPowerTrader

Well, that green shoots guff got one on the chin yesterday and stocks got mauled by the bears. The S&P 500 dived 2.85% and oil closed off 3.75% as a sobering Non Farm Payrolls slumped 467k, about 100k more than the wide eyed consensus expectation. Lookout below! The U.S. unemployment rate (red) Versus the S&P 500 monthly chart since 1993. Mmmmmm. Also worthy of a mention is that as those green shoots wither, oil has taken out trendline support and now targets the recent low at 66.25 and the 3rd of June low at 64.95.

Today’s Market Moving Stories

• Overnight the Asian session has been understandably subdued ahead of the US Independence Day holiday today, with equities drifting. Japan’s new economy minister Yoshimasa Hayashi said that the US economy has yet to hit the bottom, and that global deflation remains a threat. In the UK, retail consultancy BDO Stoy Hayward reported that retail sales fell 0.9% last month.
• California announced a 3.75% rate on the IOUs it is increasingly resorting to.
• John Williams, the San Francisco’s Fed district head of research, contended in an interview that, even if the output gap is small for the SF (as its research controversially suggested a fortnight ago), inflation is still likely to decline. Williams is attempting to reconcile the furore over his research with Janet Yellen’s rates-dovish views.
• AIG’s Jacob Frenkel has been warning that real estate and credit cards may still worsen further, with Fed credit to AIG creeping up to over $83bn last week.
• Credit indeed remains hard to get worldwide, with the WTO’s Pascal Lamy warning that exporters are struggling to get trade loans (something that was much in evidence this week during our visit to Asia – at least credit demand seems to be holding up there).
• In case you hadn’t noticed, we lost another seven U.S. banks Thursday, that’s 52 this year.

Auf Wiedersehen The Car Industry
In the Euro wonderland FT Deutscheland have details of an alarming study about the car industry, which shows that the industry cannot expect to get back to the 2007 of sales for another five or six years. Currently the industry loses €1800 per car sold on average. It has used up all the liquidity reserves, which it built up until 2007.

To get back to health, the industry requires a very large degree of concentration. Further problems loom in Germany in particular, after the expiry of the car wrecking premium. It led to a short spike in increase motor sales, by over 30% for most manufacturers. But many customers have pulled forward car purchases. Once the premium is gone, one should expect a corresponding drop in sales, on top of the slow economy, on top of the structural problems. For Germany alone, it is feared that 10-15% of car industry jobs will disappear.

Rage Against Rating Agencies
Proving yet again what a bunch of incompetent laggards rating agencies in general are, Moody’s has cut Ireland one notch from Aaa to Aa1 with the outlook negative. The action follows S&P, although S&P has cut to AA level. What is astonishing is that two years into this crisis, Ireland still had a coveted triple A rating from anyone. Talk about a lagging indicator. But its not the cut that bugs me, it’s the rationale and analysis (or the lack of it).

Moody’s says the additional burden from recapitalisation of the banks is an aggravation. This will be done via the National Asset Management Agency (NAMA). I take a different tack: Unlike Moody’s and S&P you have to distinguish between net and gross debt levels. Gross debt will rise above 100% but net will not, unless you assume zero value for the assets. The country’s capital stock is suffering from a major bubble burst, not a bombing. This is not Iraq. The capital stock still exists and has some value, so I can’t quite get our head around the Rating Agency view. It is simply wrong.

Moreover, note that NAMA will not involve the issuance of Irish Government bonds. Its more like a debt swap. But hang on, doesn’t this still mean the Irish state is not big enough to absorb the size of the debts? It would be a mini-Iceland if it were not for the unlimited ECB funding. That is, Ireland has access to the ECB balance sheet, so the worst case scenario is that Irish banks and financial institutions (which are effectively owned by the government) monetize i.e. buy its own sovereign’s debt, and get funding for that via the ECB from the ultra generous REPO facilities. This is where the new money comes into the equation and is why a default risk is substantially lower.

Anyways, the CDS spread and Irish government spreads (over Germany and Greece) currently price in much worse for the ratings than Moody’s and SandP. That is why we are seeing no reaction to the news. If you can’t react to bad news then it must be a good price signal. As an aside maybe debt issuers around the world should stop paying rating agency fees? The credit rating agencies would have to rate them anyway, so why pay for such shoddy workmanship.

Equities

• UBS has rated France telecom a sell while Deutsche bank has just upgraded chemical maker Lanxess. And Morgan Stanley has rated computer mouse maker Logitech “overweight”. Mining stocks may be weaker after copper fell for a second day on the LME.
• Elan’s agreement with J&J brings to a successful end its six-month-long strategic review process. The quality and scale of this new partner, coupled with the cash infusions into Elan and the new Alzheimer’s Disease entity, transforms Elan’s financial profile. It will also allow it to accelerate and strengthen its neurology R&D base. J&J’s $1bn equity funding in Elan reduces forecast 2009 net debt by 64%. It also provides access to a global commercial infrastructure from a top-quality partner.
• Bank of Ireland has issued a brief trading update ahead of today’s AGM. At the pre-provision operating profit level, the highlight is the reference to a “significant negative impact on net interest margin”, a trend that has been emerging across the sector as pressure on the funding side (competition for customer deposits, higher wholesale funding costs) outweighs any benefit from whatever re-pricing of loans has been possible. Customer deposits are marginally lower at end-June versus end-March while loans are broadly flat. On a positive note, there is no change to the bank’s view on impairment. It reiterates its May expectation that losses in the three-year period ending March 2011 will be in the region of €6bn. Downside risk arises in the event of a further deterioration in economic conditions or further prolonged low levels of activity in property markets — exactly as it said in May.
• Independent News & Media announced the disposal of 7.3% of its 20.8% stake in the Bombay listed Jagran Prakashan for €22m, leaving the remaining shareholding valued at c.€42m. It also announced its intention to remain a long term shareholder and does not aim to sell any further stake. The proceeds are set to be used to help alleviate concerns over the groups €1.4bn in debt. It will also be used to pay the €15m working capital extension granted as part of the recent standstill agreement.

And Finally…

• And yes, I do read it for the articles
• I’ve always viewed golf as a game for boring muppets but now its played professionally by them as well.
• Now there aren’t too many popular songs the name drop economists (I can only think of Deacon Blue’s “Dignity” which features the immortal couplet “In a far away scene sipping down Raki and reading Maynard Keynes”

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”.

© 2009 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.

Comments