Equity Markets – Asian markets were mostly higher in overnight trading with some slightly worse economic news out of China weighing on the Hang Seng (see below)…European indices are off of their highs for the morning session and domestic futures are indicating a flat opening…
Oil Markets – crude oil is creeping higher and gasoline in the US is under pressure as concerns about the potential impact on Gulf Coast refineries from the floods on the Mississippi River grow…in the MENA, Syrian security forces continue to crack down on protesters as they resort to shelling the city of Homs…Yemen protests leave one dead…AQAP leader in Yemen pledges more violence against US and Israel as revenge for the death of bin Laden. Qaddafi hasn’t been seen in public since the air strike on April 30th but NATO officials don’t know if he is dead or alive…the Libyan government insists that he is alive and will address the public soon leading many to think that he could have been badly injured in the bombing. WTI is down roughly $0.70 per barrel across the curve on the NYMEX this morning
Macro News – this morning we get the trade balance for March (looking for -$47 billion vs. -$45.8 billion in February) and the April budget statement (looking for -$41 billion vs. -$82.7 billion in March)
Earnings – today we get earnings for Cisco Systems ($0.37/share is the estimate), Symantec ($0.36/share is the estimate) and Macy’s ($0.18/share is the estimate)…
• The Bank of England sees the outlook for growth deteriorating and inflation “markedly” higher in the near term…the BoE says that inflation could reach 5% later in the year and is likely to remain above 2% through 2012. The BoE kept short term rates at ½% (3/4% below the ECB rate of 1.25% but higher than the US rate) as the bank opts to favor keeping the economy growing over fighting inflation that they , like Ben Bernanke, view as transitory.
• German inflation for April was +2.7% up from +2.3% in March
• Stuart Gulliver, CEO of HSBC said that it may take as long as 3 years to reach cost reduction targets, position the bank to focus on faster growth economies and prepare for stricter capital rules..the current target for cost reduction is between $2.5 and $3.5 billion by the end of 2013.
• Inflation in China was above 5% once again in April and lending exceeded expectations indicating that additional rate hikes and/or higher reserve requirements are likely right around the corner in the PRC. Providing some offset to the inflationary pressure was the news that industrial production growth was below expectations at +13.4% and retail sales grew +17.1% (also below expectations of +17.6%)…also producer prices were up +6.8%, ½% below expectations. This is going to take some time to play out…monetary policy usually has maximum impact about six to 12 months after enactment but the fact that inflation remains above expectations while macro growth numbers are below expectations is not good if it is establishing a new trend.
• After yesterday’s credit rally that has seen spreads on Greek sovereign debt decline by 110 basis points (1.1%) EU leaders are letting a little of the air out of the balloon, indicating that Athens must make good on pledges to revamp its economy if additional aid is to be given. Merkel called for Greece to stay the course on fiscal austerity and restructuring…this recalls the approach taken last year when it seemed to take forever for the EU/IMF to provide the initial bailout package…the EU/IMF forensic accountants will be back in Athens once again going over the books. Perhaps they should just set up a permanent office there. All of this talk of additional bailout funds to Greece come before Portugal has gotten its initial bailout funds (May 16th)…none of this is good but it continues to show that what the EU leadership is truly concerned about is the European banking system, especially that of Germany and France which own billions of sovereign debt.
• In other news from the Hellenic Republic, general strikes today shut down the transportation systems as the unions protest the fiscal austerity and planned sales of government owned assets to raise the euro needed for debt repayment…this illustrates what lies in store for countries whose political process is dominated by union pandering programs orchestrated to gerrymander the election process.
• Subprime RMBS are being tested once again by the market as the FRBNY auctions off the securities held by the Maiden Lane II special purpose vehicle…these bonds declined 0.64% in April after falling 0.23% in March for the first consecutive months of declining prices since March 2009 (the bottom of the market). Prices are down about 0.11% this month as the amount of securities put out for the bid approach $6 billion (there were roughly $31 billion when the SPV was created back in 2008). It will be interesting to see just how these auctions proceed as AIG was prepared to buy back the entire portfolio for what it was “marked” by Blackrock ($15.7 billion) but FRBNY officials declined to accept that offer (what does that say about their faith in Blackrock’s pricing) and instead opted to put bonds out for bid the first of which fetched about $1.6 billion at an average price of around $88.60…we should get results from the 2nd auction sometime in the next couple of weeks.
• Allied Irish Bank is offering to repurchase subordinated debt for 10% of the face amount as the Irish Government tries to reduce their total debt obligations…AIB says that bondholders who refuse the offer could receive as little as 1% of face. AIB currently has €2.6 billion of subordinated debt…Ireland was forced to agree to pay senior bondholders 100% of face in order to get their bailout from the ECB (once again this points out the interbank holdings of debt throughout the EU banking system). AIB has to raise an addition €13 billion of capital following the latest round of stress tests…this comes on top of the 7.2 billion that the Irish government has already pumped into AIB.
• The slide in AIG shares since January will further reduce the total amount of fees that the banks leading the US Government’s sale of stock are set to receive…the banks have already cut the fees that they charge to ½%. The Treasury holds 1.66 billion AIG shares (92% of the total outstanding) after swapping $49.1 billion of preferred stock for common stock. AIG stock is down 42% this year following the Japanese earthquake and higher reserve requirements in their main property & casualty insurance business (Chartis)…so the banks have cut fees and must work harder to sell a less than hot stock. The offering is currently planned for May 24th but could be delayed. The Treasury’s breakeven price is $29/share.
Phillip Pennell, CFA
Turnberry Capital Management
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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