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At the open...4-18-11

Equity markets were mostly lower in overnight trading in Asia…Europe is trading lower in the morning session following Finnish election results, more debate over a Greek restructuring and reports of Spain taking a majority stake in 4 Cajas…US futures indicate a lower opening as well.

News –

• As anticipated, Chinese banking authorities have ordered banks to once again increase their reserve requirements by ½% which takes the total requirement to 20.5%. The latest move comes two weeks after regulatory authorities moved to increase short term interest rates. This marks the 4th reserve requirement increase for the year as the country tries to control the inflationary pressures that are eating away at consumers purchasing power and ultimately could threaten the communist state’s political stability as the pace of urbanization has quickened on the mainland. In 2009 the rural population is estimated to have been 46.6% of the population (1.334 billion total population on the mainland) in 2001 this was 64% and in 1990 it was estimated to be 74%. The point is that what was once a largely agrarian, subsistence farming economy has in 20 years swung to a predominantly urban population base that is dependent on jobs for their subsistence and will be significantly more sensitive to inflationary pressures. The ultimate reactions can be a return to the rural areas to take up subsistence level farming again or the real possibility of social unrest which could lead to calls for social and political reform. Bottom line the political leadership faces an extremely difficult decision making process going forward…1. Do we exert less control over the currency and allow the Renmimbi/Yuan to establish its own trading range in the F/X markets which would help control inflation but risks reducing exports; 2. Raise wage rates to prevent the social unrest from ever higher inflation which in turn simply adds to ever higher inflation; or 3. Combat inflation with tighter monetary policy in an attempt to choke off rising internal demand for housing and durable goods…what we’ve seen is in fact a combination of all three and at least to this point, the actions haven’t done much to either stall demand or inflation.
• Other governing council members of the ECB have signaled that the trend toward a tighter monetary policy is likely to continue following the decision to raise short term rates by ¼% to 1.25% earlier this month. Such actions would likely drive the euro higher against the dollar and could exacerbate the internal economic pressure on those countries whose economies have not experienced the recovery that Germany and other northern European countries have.
• The Bank of Spain says that bad loans as a percent of total loans rose to 6.19% in February from 6.06% in January…news sources report that the Spanish Government will invest €7.7 billion in 4 Cajas (savings banks) in exchange for majority equity stakes.
• Greek officials continue to insist that there are no imminent plans for a debt restructuring…this after the German Finance and Deputy Foreign ministers suggested that further measures may have to be taken in the case of Greece but that these measures wouldn’t be a disaster. Current credit spreads on Greek debt suggest a 63% chance that a restructuring occurs within five years as Greek 10-year debt now trades 10.41% HIGHER than German 10-year debt with the 3.6% notes due 7/20/2016 priced around €59.25 to yield 13.7%. Two year Greek debt is closing in on 18% yields with the 4.6% notes due 5/20/2013 priced around €78.50…
• Finland’s election results shifted dramatically in favor of parties who campaigned against the bailouts of Greece, Ireland and now Portugal as the Center Right Party (currently in power) was tossed out and the country will likely form a government with an openly “euro skeptic”/bailout opposing political party playing a central role in governing the country going forward. It appears that the new government will likely demand new negotiations over the EFSF/ESM. If Finland (Aaa/AAA) withdraws its support from the facility it could led to a domino effect for other northern European countries whose populations would prefer not to support the profligate southern European countries either but have so far not wanted to be the first to step out of line…looks like Finland could change all of that.

• As inventories for agricultural products from grains to cooking oils continue to slide the growing fear is that weather related supply disruptions could create a spike in prices along the food chain that could lead to social unrest in the developing world should food price inflation spiral higher.
• Various market participants and strategists debate the impact of the end of “QE2” on the US Treasury markets “long end”…strategists offer than the strong demand for US Treasuries that are “off the run” or not the recent benchmark offerings suggest that there is sufficient demand in addition to the Federal Reserve to absorb Treasury issuance after QE2 ends…others claim that there is no way that removing the largest buyer of US Treasuries in the last 6 months will not drive market yields higher…which way the market ultimately goes will likely depend on the impact that the removal of QE2 has on economic growth expectations. If you believe that the removal of QE2 will have little impact on economic growth then a rise in rates as investors shun fixed income is likely, if on the other hand you view the end of QE2 as growth inhibiting which could lead to a decline in growth and a resurgence in deflationary fears then you could see more money flow back into bonds. Of course the political debate over the budget and the debt ceiling as well as potentially volatile social situations throughout the Middle East will impact demand as well. This much is certain, over the last six weeks the Federal Reserve Bank of New York (FRBNY) has added almost $138 billion to their holdings of US Treasury obligations with the total now owned of $1.37 trillion…there’s another $1 trillion plus of notes and mortgage-backed debt of Fannie Mae and Freddie Mac.

• Research in Motion (RIMM) could take a big hit if the US Government allows workers to use other smart phone technology such as the iPhone…RIMM has insisted that its security features are superior and if the government (which is testing other devices now) opts to allow other devices to be used such action would appear to negate RIMMs previous claims.
• Domestic macroeconomic news releases are light today with only the NAHB Housing Market Index for April at 10:00…the survey is looking for a reading of 17 vs. the prior month’s reading of 17.
• Rebel forces reportedly repel an attack by forces loyal to Qaddafi in Ajdabiya…Libyan government forces are reportedly lobbing high explosive rounds into civilian population centers as the rebel forces call for supplies of heavy weapons and additional NATO led airstrikes…oil is lower in morning trading on the NYMEX but retail gasoline continues to hover around $4/gallon.

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
(203) 917-2255 (Mobile)

The contents of this posting do not constitute recommendations to buy or sell specific securities. Any individual wishing to buy or sell securities for their investment account or that of others should consult with their investment advisor prior to entering into any securities related transaction.

Today is: April 23, 2017 - 9:34pm
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