Equity markets – the red ink continues to flow as trading in Asia was mostly to the downside (the exception being the All Ordinaries in Australia…South Korea and Japan were closed)…European indices are lower this morning given disappointing industrial goods orders for Germany in March, some disappointing corporate earnings releases and concerns that remain over the sovereign debt crisis…domestic futures indicate another lower opening. As we begin to close out the Q1 earnings season, focus on the macro numbers will take over and the market will likely be more responsive to the fears of a slowing global recovery as the developing world opts to fight inflation in food and energy (makes up a larger share of their overall consumption) while the OECD countries just try to get out of their own way as growth impediments are more political/regulatory.
Oil Markets – oil is getting routed this morning as growth concerns begin to overtake supply disruption/Cairo Spring concerns…the Libyan civil war continues to rage but it appears for the time being that no further knock-on effects are happening at the moment. Meanwhile, WTI is down $2.50 / barrel to $106.74 for the near term contract (June)…in fact, energy futures are red across my entire screen at the moment and I can’t recall when the last time I observed this was. Current prices imply average retail prices below $4/gallon for the first time in at least 2 weeks…
Economic Releases – ok, today we’ll see if we get a real turn in what the market starts paying attention to…until this week it had appeared that bad news was good news and good news was really good news…now we start to get growth questions coming out of Europe (see below); India announces higher than expected rate hikes to get inflation under control; China is expected to follow suit; US GDP for Q1 was somewhat disappointing and today we’ll get non-farm productivity numbers and unit labor costs…if these trends that have been wind in the sails of the stock market start to show declines in productivity and higher unit labor costs, that isn’t good news for margins in the industrial economy and will likely put downward pressure on those sectors which have driven much of the YTD run in the US market…oh yeah, we get weekly unemployment data as well. The other nugget today is April retail chain store sales…retail has been a little weak the last few trading days so it will bear watching what goes on here.
Earnings Calendar – we get 36 of the S&P 500 today and so far this morning, 3 out of 4 companies have beaten EPS and sales estimates…of course the real questions surround the outlooks…
• Lloyd’s down almost 9% as the bank takes $5.3 billion in charges related to payment protection insurance (PPI) sold to customers…net interest margin was down 5 basis points sequentially and the bank took £2.61 billion in loan book write downs which was £500 million higher than the bank’s own estimate.
• SocGen Q1 profit drops 14% year over year to €916 million (1.06 billion was the expectation) the miss stemmed from charges related to the bank’s loan portfolio and the unrest earlier in the year in North Africa.
• German factory orders declined 4% in March against a forecast of +0.4% (that’s quite a miss)…also February factory orders were revised lower to +1.9% from the +2.1 increase previously reported. The breakdown of the order decline was exports -4.3% and domestic -3.5%. Granted, these are monthly numbers and as such contain a good deal of month specific volatility but regardless, this isn’t good news for the engine of Europe. The DAX drops to its lows for the morning session following the news release.
• Portugal expects its GDP to decline 2% this year as the government announces additional austerity measures required to qualify for the aid package from the IMF and EU…in March the government had projected a 1% decline…clearly these people are guessing as to the impact on the economy.
• The Bank of England will announce its decision on short term interest rates this morning and expectations are that it will maintain the current level of interest rates. The ECB meets today as well to decide on the level of short term rates and provide an outlook for where the bank thinks things are heading as we march toward the end of JCT’s time in office. Expectations are that the short term benchmark rate will be held constant at 1.25% but any indication of “strong vigilance” regarding inflation will be a signal that the ECB could decide to push rates higher by June.
• Caesars Entertainment (FKA Harrah’s Entertainment) is attempting to extend $5.8 billion of bank loans currently scheduled to mature in 2015…the casino company is also asking the bank group to allow it to make tender offers for its other debt below par as the company tries to get back on track to do an IPO that will raise proceeds to allow it to further de-lever and perhaps save the $30.7 billion LBO that at one point looked certain to file for bankruptcy protection from creditors.
• As more questions come out about what Pakistani officials knew regarding the whereabouts of bin Laden (found 30 miles from the capital of Islamabad) congress will likely have some contentious debates going forward regarding the true value of aid sent to Pakistan ($4.35 billion in 2010).
• The about face regarding the actions of David Sokol continues at Berkshire Hathaway as Buffet and company back peddle as fast as possible away from the situation that they initially indicated was a “non-situation”…this my friends smells like a cover-up/whitewash for a revered investor whose internal controls were and likely still are sorely lacking.
• South Korea ratified the free trade deal with the EU (trade between the two was $92 billion in 2010) and now will likely focus its attention on the as yet un-ratified deal with the US (the country’s 5th largest trading partner behind the EU).
Phillip Pennell, CFA
Turnberry Capital Management
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