Equity Markets – Asian markets were hammered in overnight trading following yesterday’s sell-off in the US and continued fear of slowing growth as China tries to find ways to trim their growing inflation (lower commodity prices will certainly help). The Hang Seng is now essentially flat for the year to date and only the KOSPI remains well above level after hitting an all time high on the 2nd (yes down 4.8% in the 10 days since). European indices are lower across the board in the morning session with Germany (the most vulnerable to a slowdown) leading the charge lower…domestic futures indicate a lower open.
Oil Markets – with higher gasoline prices in the US trimming demand, resulting in a glut of crude oil on the market (likely helped as well by OPEC “cheaters”), crude continues to slide with WTI down $2.33 this morning (we’re now below the price on 2/28/11) on the near term contract (some contango has been brought back into the market) and down $5.06 on the Brent near term contract (the spread is still $17/barrel)…gasoline futures (RBOB) were limit down yesterday and today looks like it could be limit down again…
US Dollar – the dollar continues to rally adding to the demand (or lack thereof) driven conflagration in the commodities markets and making fixed income more attractive.
EU Credit – market is relatively quiet this AM with most of the trading in the index (SOVX)…ECB/IMF continue to throw water on the fire that is Greece restructuring but the market is having none of it with Greek credit spreads still near all time highs and the other more speculative names gradually widening…this will continue to drive demand for corporate credit and higher grade sovereign names…
• So now it appears that the global growth story is once again under attack as the run in oil prices touched off inflation in the energy intensive growth areas around the world resulting in rate hikes, increased reserve requirements and other governmental behaviors ideally designed to restore a sustainable rate of real growth. Of course with most of the OECD world still struggling to recover from the late ’07 through mid ’09 recession and the resultant massive public debt accumulation from fiscally accommodative governments, throw in a Japanese earthquake and nuclear disaster and it becomes easy to see why once the markets start to pay attention to the precarious nature of the current recovery the stock market may think that a pull back / retest of last year’s late spring / early summer doldrums could be in the cards…
We’ve had a roughly +30% run in the S&P 500 since the rally began late last summer following the retest of the pullback from the original PIIGS crisis. So the obvious question that remains is what are we in for next? There are those that suggest that the market will once again test the lows from last Spring which would imply a roughly 290 pt. pull back in the S&P. While certainly possible, it Fails the sanity test for a couple of reasons: 1. Last spring we were 1 year removed from the markets lows and the topic of du jour was the “double dip”…how long has it been since you heard That term used? Think about it 2. At this same time last year everyone thought that the EU was going to tear itself apart because the Germans were likely unwilling to make the sacrifices necessary to keep the EU from going off a cliff following the bailout of Greece and Ireland…the Germans have shown a willingness to bite the bullet because they realize that the banking systems are too heavily tied to the outcomes of the various sovereign debt crises…what are we talking about now? Greece bailout II…I mean come on, they’re unwilling to even have the banks take a haircut on the Greek debt that they own currently (you’d hope that they’d been selling following the rally resulting from bailout I, remember Greek spreads were +600 bps for some time following the 1st bailout…double that now). Bottom line, we’ve established a weak global growth pattern and a willingness on the part of various large players to “act rationally” in the face of economic collapse so I don’t think that pulling back to last year’s lows is in the cards. Having said that, ½ way back is certainly possible which would get us to around 1270 on the S&P.
• After the run that commodities have had lately, investors are taking some money off the table and sitting in cash? Based off what I saw yesterday in terms of high yield prices on some more speculative credits it would appear to me that we’re seeing a shift of funds from some of the commodity investments into fixed income…it’s logical to see a shift into the high yield market given the general expectation that we’re not heading for the double dip but that the torrid growth that we’ve seen in commodities prices driven at the margin by emerging markets growth is certainly at risk as the US considers measures to pull back on both fiscal and monetary stimulus and higher oil prices have started to take a bite out of demand. The next shoe to drop in the US is likely retail sales although they’ve held up surprisingly well in the face of little wage expansion at the margin and very slow improvement in employment growth…this could be in part driven by those who aren’t paying their mortgages but remain in their homes and thus have the extra money to spend elsewhere, assuming that they’re gainfully employed. This is a long way around saying that dividend paying stocks in less volatile sectors could begin to outperform here after lagging for most of the year.
• The Irish government has said that they may need to haircut SENIOR bondholders in Anglo Irish Bank if the nation has to put up more capital so it may come as no surprise that the most recent round of stress tests suggest that no additional capital is necessary…
• Flooding along the Mississippi continues to threaten residents in Louisiana as well as crops…the current flood levels haven’t been seen in 7 decades.
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