US macro news – today we get the import price index numbers for April (MoM expect +1.8% down from the previous 2.7%; while YoY expect +10.4% up from the prior +9.7%) and wholesale inventory numbers for March (looking for +1% to match February’s reading of +1%)…we also get the index for April small business optimism (91.8 down from 91.9).
Earnings releases – another light day on the earnings front as Q1 earnings season winds down with 421 of the S&P 500 companies already reporting. So far this quarter, EPS has shown growth of 20.8% with an average surprise of +7.42%...net income has grown at a slower pace of +18.2% (indicating share buy backs accounted for 2.6% of the growth in EPS) while the surprise in net income was +6.62%. The most bullish news for many though has been the growth in the top line of almost 10% (+9.97%) with a +1.06% surprise to higher sales. The other interesting bullish sign is the 14.8% increase in sales of consumer discretionary items…this sector has put in the largest positive surprise +3.6%. The most negative sales figures have come from utilities(-3.23%) and financials (-1.51%) but financials still did better than expected with a +1.62% positive sales surprise…utilities on the other hand did much worse than expected with a -3.8% surprise. The utilities sales figures contradict what otherwise is a relatively robust macro growth story…we won’t see sustained macro growth without growing demand for electricity…electricity demand goes up with the “off peak” consumption due to running extra shifts at industrial plants at night to satisfy demand which in turn drives demand for labor…so without growing demand for industrial products that eventually outstrips the ability of increased worker productivity to keep up with said demand we’re not likely to see significant declines in the unemployment rate nor significant improvement in electricity demand.
Equity markets – asian indices were mixed in light trading as the Hong Kong and South Korean markets were closed…European indices are currently near their highs for the morning session and US equity futures have improved over the course of the last hour and now indicate a slightly higher open
• A longtime bell weather of the US economy, corrugated box shipments, rose 4.1% in March (average weekly increase) the largest monthly increase since 1997 and indicates continued growth in the US economy for at least the near term. As long as box shipment orders are growing, that’s good news for the transportation business as ultimately every box ends up on a truck going somewhere.
• Flooding along the Mississippi River has wreaked havoc with river based shipping logistics and crops and now threatens Gulf coast industries including refineries which will add to the upward pressure already on gasoline prices from a weak US dollar and unrest in MENA…
• Credit spreads in the EU are tighter this morning as rumors circulate that the IMF is going to come up with an additional €60 billion for Greece…this has resulted in an across the board rally for EU credit spreads, especially in the PIG countries…again this is only rumor and one has to believe that further bailout funds for Greece would be difficult for various EU members to swallow politically nor is it likely that the IMF would extend additional funds without the rest of the EU supporting such action by word and deed. This comes on the heels of Greek spreads reaching an all time wide of near 14% after rumors of an imminent debt restructuring (either debt write-off or maturity extension and coupon change…same difference) circulated through the market yesterday. Without any action from the political leadership to serve as a guide for trading you can expect volatility to increase in the credit spreads of the most vulnerable EU countries.
• EU banks are pushing hard not to force a restructuring of Greek debt as it such a write down would fall heavily on the EU banking system…so now Germany is backing off from prior indications that it may be willing to accept a restructuring of Greek debt.
• China reported an $11.4 billion trade surplus for April compared with a $140 million surplus in March and a $1.68 billion surplus in April 2010. Growth in imports slowed to +21.8% while exports were +29.9%. While the currency is being used as a political football, China’s argument is that much of the surplus is a result of foreign countries (such as the US) that have goods assembled in China and then shipped back to the home country while much of the core components come from the US or other foreign countries. Of course, if this were true and accounted for the lion’s share of the trade surplus it clearly implies rising wages in China as what Chinese officials would be implying is that the primary “value added” is simply the cost of Chinese labor used to assemble the products. Chinese and US officials will meet in Washington for the annual Strategic and Economic Dialogue and clearly the appreciation of the Yuan will be on the top of the list for the US Secretary of the Treasury.
• The disconnect at Bank of America – much like Ken Lewis the prior CEO, Brian Moynihan is facing unhappy investors and growing analyst skepticism that he really understands how bad the US housing market is…while the various economists at BofA are and have been predicting that the housing market could be down as much as 10% this year on an overall basis as foreclosed properties hit the market and weigh on prices, the bank’s leadership has adopted a more optimistic outlook for US housing and so far they’ve been wrong. The result has been a decline in Bank of America stock that may be the result of concern about the bank’s leadership as much as it is concern about the bank’s balance sheet.
• In other US housing news, the Mortgage Bankers Association say that borrowers who don’t qualify for a QRM (qualified residential mortgage) could face rates as much as 3% higher than for those that do qualify…the idea behind the QRM is that it would be a more uniform mortgage in which the buyer puts down 20% and meets other standard credit underwriting criteria which could then be securitized and sold with the securitization relying more on the credit quality of the underlying loans rather than the presumed credit quality created by the securitization structure itself…in other words more like GSE guaranteed paper without the GSE guarantee and consequent burden on the tax payer when the GSEs can’t meet their obligations (what we have now with Fannie and Freddie). Banks aren’t required to stick to the QRM guidelines but if banks do issue “non-QRM” products and securitize them then they are required to retain a 5% residual equity piece of the deal that would suffer the first loss. There is no so-called risk retention requirement with the QRM. Clearly, a market strictly tied to a QRM would not be good for either the housing or residential construction markets as many potential borrowers wouldn’t qualify and higher rates outside of the QRM structure would also choke off potential demand for housing…it’s estimated that 4mm potential buyers are knocked out of the market for housing with each 1% increase in rates.
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