Investor Risk Appetite Is Back But Look Beyond the Gloss

Stock-Markets / Financial Markets 2009 Jul 15, 2009 - 04:10 AM GMT

Best Financial Markets Analysis Article Having run ahead of itself Monday the markets gave a muted response to Goldman Sach’s monster numbers yesterday, but the 28 point upmove in the Dow was enough to put it back into the black for the year for the first time since July 1st. After flip flopping for much of the day equities were given a fillip late on from a report from BoA / Merril Lynch’s Michael Hartnett who believes the recession ended in Q2 2009.

Today’s market Moving Stories

For most of yesterday it was all hail Goldmans. But the great thing about the net is that there’s ALWAYS someone ready to rant & rave and take a more jaundiced view. And it seems not everyone is enchanted by Meredith Whitney either.
Overnight the Bank of Japan voted to extend its corporate funding support measures on Wednesday beyond their planned expiry in September. Interest rates were kept on hold, as expected. And the BOJ lowered its estimate for Japan’s gross domestic product in the year to next March to a contraction of 3.4 percent from its earlier April projection of a 3.1 percent contraction.
China money supply, June: You can take your pick, but every result was strong. M0 is up 12% over the past year, M1 25% and M2 29%. Loans are up an incredible 33% and currency reserves topped USD2 trillion.
FT Deutschland has a story on yesterday’s proposal by the International Accounting Standards Board (IASB) for new accounting rules, and the mostly negative reaction by the German and French insurance industry. The IASB published a proposal to change IAS 39, which deals with the valuation of securities held by financial institutions. Under the proposals, bonds and other fixed income securities with fixed maturities should be valued at cost, while stocks and structured products should be valued under the principle of fair-value accounting. The German insurers say this rule change means that they would dump shares, as any losses would affect their capital. The finance ministers of Germany and France support the industry, and call for more flexible rules. The industry wants softer rules, while IASB wants simplification.

Equity News

European sunrise equities in the news include bellwether euro tech stocks STMicroelectronics, ASML & Infineon which, despite my scepticism about the Intel numbers, have jumped out of the gate this morning and are up 4%.
Rio Tinto should also be bid after saying that Q2 iron ore output was up 8% & that they expected a recovery in steel demand from China to continue in H2 2009.
Auto stocks may get some support on news that European car registrations rose in June for the for the first time in fourteen months as government-backed scrapping incentives fuelled demand in more than 10 countries
Tullow Oil this morning announced that they were given the go ahead on July 13th by Ghana Minister of Energy for the Jubilee Field Phase 1 development plan and utilisation agreement as expected.
Bank of Scotland Ireland are to unveil its banking review at the end of the summer, with media speculation also suggesting it will shrink or close down its Halifax retail network in the Republic. And it seems that the Irish banking landscape is set to change radically in the short/medium term as foreign owned banks begin to repatriate assets. National Irish Bank is scrapping the second half of the €20m branch expansion it announced three years ago. A spokesman said “Given the severity of the economic downturn in Ireland, the proposed branch openings for this year are on hold”.
Northern Foods issued a trading statement this morning and reported that like for like sales grew an impressive 5.5%, driven by increased volumes rising 4.2% in Q1 and prices rising 1.3%. This should be a positive sign for Greencore.

Intel
Earlier stocks reactions to the (leaked) GS blowout was tempered by the news of worse than expected wholesale inflation numbers & sluggish retails sales numbers (once the free autos & gasoline sales were stripped out). There was notable weakness in tech stocks with Dell off 8% (on downbeat comments Monday evening). Apple and Microsoft also struggled. This may be wholly reversed today as Intel’s numbers after the bell caused Nasdaq futures to jump 2% in after hours trading. But beware the headline & read the entrails; here’s some more erudite analysis.

Intel’s Chief Financial Officer, Stacy Smith, told Reuters that computer markets were strengthening and there were “pockets of relative strength” in consumer PC markets and in Asia Pacific and China. But he also noted that the corporate market remains weak and does not expect much of a change in the second half of the year. Also it was specifically stated on the conference call that US consumer sales were weak, and repeating what DELL said earlier, so are enterprise sales. Note Intel’s P/E ratio is now 20:1 so its stock has priced in a strong recovery ALREADY. However these results have been spun as some kind of tech elixir by the newswires. See this quote below from Reuters

“But it was Intel’s results after the bell that really got investors excited as the chip maker’s earnings of 18 cents a share far surpassed forecasts of 8 cents. Its outlook also blew past forecasts, potentially signally stronger consumer demand for personal computers. Investors and policymakers have been anxiously looking for signs of a pick up in U.S. demand, which is key to a solid global recovery”

Caveat emptor

The Mole Is Back In The Bunker
Meredith Whitney hit the funny bone of the financial markets this week. The risk aversion trades (viz, a strong yen and dollar and strong Treasuries) had grown tired late last week. The market seized on her pro-Goldman speech, while ignoring her thinking that the Goldman-positive outlook “is deeply rooted in our sustained bearish stance on the US economy and state of US financials at large.” Simply put, the market was teed-up for good news and the result was a nice rebound in global stocks and a near-term breakdown in the Treasury market. My serious concerns about the staying power of the consumer are unwavering, but I recognise that there are times, like this, when I’m going to have to retreat to the bunker.

Trouble In The Bond Markets?
The one story that highlights the two sides of the proverbial bond market coin is the bubbling issue over state finances. Yesterday’s FT wrote that California’s Budget/solvency ills may ultimately infect the nation as a whole. It’s no stretch to see how the Feds may not stand idly by if California’s politicos fail to close a Budget gap that is partly structural given the recession and the myriad of propositions that prevent tax hikes and/or cuts in things like education spending. Should California’s vast USD69b debt market edge away from “selective” default on IOUs to something worse, the Feds would almost certainly have to provide support. Then, as the FT points out, if you chuck a lifeline to one state, you’d have to support others.

In normal times contagion in State municipal debt markets would be a bullish event for the US Government Treasury bond market as fears would elevate over the likely surge in jobless ranks and higher local tax. However, these are not normal times when we learn that nine months into a fiscal year the nation’s Budget deficit has topped $1 trillion for the first time. In these circumstances any threat of more intervention (think the WSJ front-page splash that the Treasury is prepping to aid Citibank) only elevates bond market fears of more Treasury supply to fund this support.

As we saw with the market’s reaction to Meredith Whitney’s comments, the market is currently in a mode where more financial problems = threat of more Government intervention = a greater burden on Government finances, with growth ramifications be damned. Shoot Treasuries first, ask questions later, is the current cry and I have to accept it even as I stay focused on the broader, weak-growth story. Indeed, this seems like one of those times (namely, a turning point in an over-extended market) where technicals can overwhelm a broader fundamental story. That’s exactly people like me are trained in the heresy (for some) of technical analysis after being schooled in economics.

Data Today

UK unemployment, Jun (09:30 BST): Annual growth in average earnings should rebound from 0.8 to 1.7%, although ex-bonuses growth should ease from 2.7 to 2.6%. Claimant-count unemployment should rise by 50K, while the LFS unemployment rate should rise to a twelve-year high of 7.5%.
FOMC minutes (19.15 BST): The focus will be on QE given the Fed is on target to hit its USD300b Treasury limit just before the September FOMC meeting. The minutes will also include updated economic forecasts.
US CPI, Jun (13.30 BST): The CPI should soar by 0.7% on higher energy prices. The core CPI should post another 0.1% increase.
US New York Fed Empire PMI, Jun (13.30 BST): The PMI should rebound back to -5, consistent with a small decline in activity.
US industrial production, Jun (14:15 BST): Survey data have improved, but overall output should decline by 0.9% given sharply lower auto assemblies.
China GDP, Q2 (03:00 BST): Annual GDP growth is expected to accelerate from 6.1% to a below-consensus 7.2% on public and residential investment.
Notable earning due today include Abbot labs ($0.89), Texas Instruments (-0.06) State Bancorp ($-0.22), Union Bankshares ($0.25) and AMR ($1.28)

And Finally
Now while I’m now fan of Barclays, I do like their new add….love the Hank Paulsen cameo dummy our hero passes in the Street.

And next time you are at the 11am service in the Deep South, sit next to this guy.

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”.

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