Equity Markets – Asian indices were mixed in overnight trading with the Hang Seng and the Straits Times as the best performers…European indices are lower across the board in the morning trading session with Spain as the worst performer, not surprising given the return to “debt crisis mode” as a result of the Greece rumors (see below)…US futures have turned from indicating a positive opening to now indicating a flat to slightly negative open.
Economic Releases – there are no significant macro data releases slated for today…
Earnings Releases – earnings are light today as well with two power/utilities (Sempra and AES…looking for $0.99 and $0.26 per share respectively) and two food related companies (Tyson and Sysco…looking for $0.44 and $0.41 per share respectively).
• Still treating symptoms…€256 billion later the EU finds itself in many ways back at “square 1” with the so-called sovereign debt crisis. A special meeting of EU finance ministers on Friday in Luxembourg lends some credence to the Der Spiegel announcement that came out Friday indicating that Greece was considering pulling out of the EU so that it could go back to the Drachma and essentially attempt to hyper-inflate its way out of its current financial straits. The meeting produced what appears to be the next bailout of Greece almost a year after the initial bailout of Greece. The poker hand of the Greek government is pretty strong in that much of its current debt load is held by European banks and the ECB and any pull out from the EU would pretty much make this low coupon debt worth significantly less than it is now (2 year debt around 70% of face and 5 year debt at roughly 59% of face) and could trigger a run on all PIG debt which would once again throw the banking system into turmoil and require significant monetary assistance to the system at a time in which the ECB would rather worry about inflation since price stability is its only mandate. The bottom line for now is that it appears that Greece will get additional funds (the rumor is that this time the debt could be secured by Greek assets…are you kidding me? What is the ECB going to do, foreclose on the Parthenon?) Again, all of this makes for great theater in terms of riots in the streets of Athens with fears of the same in Lisbon and perhaps Madrid but the real bottom line here for the EU leaders is to protect the banking system and preserve the Euro so look for them to continue to put band-aids on bullet wounds in hopes that global growth will bail them out. As for credit spreads, the SOVX index has widened back out to 193 basis points (1.93%) after rallying back to around 150 basis points last month. My expectation is that you’re still looking at a 150 to 250 basis point range for the time being which would put us right in the middle for now. The situation to watch remains Spain as once again it comes down to the banking system and for them its real estate loan related…that’s familiar.
• Ryanair threatens to reduce routes to Spain and cut workers in that country unless levies against it are lowered by the Spanish Government…the low cost Irish carrier consider the levies disproportionate and discriminatory.
• AIG – the Federal Reserve has put out the latest numbers on the Maiden Lane special purpose vehicles that were created upon the bailout of AIG and it appears that the first series of asset sales went fairly well. The Fed auctioned off $1.7734 billion of face value of mortgage securities (ML II is all mortgage related debt) and with the proceeds repaid debt balances of $1.614 billion indicating a price of $88.59 per $100.00. The current debt and interest owed on the account is $11.05 billion with an estimated fair value of $14.97 billion. The Fed currently has two other lists out, one of which closed last week with a face amount of $2 billion and one of which will close this week with a face amount of $458 million. We’ll see if the prices of these securities continue to hold up as the Fed releases the next set of sales results next week. As for AIG, if the Fed were able to liquidate both ML II and ML III at the current value estimates the resulting cash paid to AIG would be on the order of $8.7 billion or roughly $4.85 / share.
• Earnings results from Q1 continue to show that a manufacturing renaissance of sorts is going on in the US led by the application of technology driving working productivity to highs not seen in decades which in turn has kept wage growth on a per unit of production in check…Q1 unit labor costs were +1.0% while productivity was +1.6% with the gap at 2x what analysts had expected. Add to this the weak US dollar and you have a recipe for capital equipment exporters (CAT, DE, BA, etc.) to drive earnings for at least the next couple of quarters which is clearly being priced into the industrial sector by the market. My guess is that we may see a rotation out of more commodity related equities (as volatility in commodity prices scares away investors) and into the industrials whose products are needed to produce the commodities (Caterpillar, Joy Global, etc.)
• US Treasury price volatility fell to a four year low of 74.8 basis points…the volatility measure was as high as 125.2 basis points (1.252%) in December…think of the volatility such that whatever the mean (average) US Treasury rate is at a point in time (say 3.25% for the US 10-year) then roughly 70% of all yields over a specific period of time should fall between 3.25% +/- 0.748%...so essentially 2.5% to 4% is your range. With QE2 winding down and given that the Fed has probably been the largest single buyer of US Treasuries since the end of last year when QE2 went into effect this says a lot more about the market expectations for global growth (worsening) than for the fact that investors will step into the shoes of the Fed and buy up all of the Treasury notes (must be issued to support our current budget deficit + roll short term debt) because they’re bullish on the credit quality of the US. So far it’s Gundlach 1 / Gross 0…for those of you keeping score.
• Saudi Aramco (the state owned oil company) has said that it plans to spend $125 billion over the next five years to increase its refining capacity by 50%...with “crack spreads” (the refining margin to turn crude into gasoline, diesel, kerosene, etc.) at relatively wide levels this looks like a decent opportunity for the time being but it’s more predicated on refined product demand from Asia going forward and Saudis likely think that they can build the refining capacity now and ship refined product to Asia making it less economically appealing for the Asia countries to increase their own refining capacity. Should be bullish for refined product tankers…think of floating bombs cruising around the Straits of Hormuz at 12 knots…
• In other news in the MENA Syrian forces fire on protesters in Homs (the 3rd largest city in Syria) reportedly killing 14 people. The Assad government appears to have lost the southern part of the country where the majority of the protests and violence have come from. The death toll from the almost 2 months of government crack-downs stands at 600 with more than 3,000 arrests…one has to wonder if Syria had the oil reserves that Libya does would the tables be turned with the West much more interested in condemning the Assad government and using more forceful measures to cause political change? The same question can be asked with regard to Yemen where protesters continue to clash with government forces…Saleh would be set to leave office (held for 3 decades) at the end of the month according to a plan brokered by the GCC but that plan hasn’t been signed yet and the Yemenis are growing more restless by the day. When everything is taken into account, oil is higher but still well off its recent highs.
Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
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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