Equity Markets – US futures are currently indicating a flat opening…European indices are off of their morning highs and Asia was somewhat mixed in overnight trading…for a good example of late momentum, the SENSEX which ended up 1.07% on the day gave back ½ its daily gain in the last hour of trading this morning.
Macro releases – today we get CPI data on a sequential and year over year basis for April…excluding volatile food & energy prices, economists are looking for +0.2% and +1.3% (month over month and year over year respectively). Including food & energy the expectations are +0.4% and +3.1%.
Oil Markets – WTI is up about $1/barrel on the NYMEX with the futures curve remaining essentially flat out 12 months…
Earnings Releases – very light day given that it’s Friday and earning season is almost over for Q1…today we get Agilent (A) estimated to come in at $0.65/share…once again, to recap: 432 of the S&P 500 companies have reported and the largest EPS surprises have come from the materials sector (+13.8%) and financials (+10.7%)…this is interesting in that materials have been the hottest performing sector (although getting beaten up this month) and financials have been the worst performing sector…interestingly, when you look at just net income performance instead of EPS the industrial sector pops to the top of the surprise category @ 9.6% followed by materials @ +9.1%...financials drop all the way to 6th at +7.66%. This is illustrative of the fact that the financials sector is taking advantage of this opportunity to return money to share holders via stock buy backs when they can buy their stock below book value. So overall the financial services industry appear to view their own balance sheets as attractive investments and well they should with most of the stocks trading at or below book value per share. What these buy backs do is “coil the spring” and given that the companies are expected to continue to generate positive net income I’d expect this behavior to remain intact until such time as more attractive opportunities arise. We’ll dive further into earnings over the weekend.
• Germany and France announced GDP growth for Q1 of +1.5% and +1.0% respectively…those figures exceeded expectations of +0.9% and +0.6% (again respectively). The 17-nation EU grew at a +0.8% rate in Q1, +0.2% higher than the median forecast. While the growth numbers exceeded expectations the problem of discontinuity in economic performance between members remains and is giving the ECB headaches. The central bank has its single mandate of price stability and the threat of the bank deciding to raise short term rates to keep inflation in check further raises the specter of a worsening economic situation in southern Europe and the continuing threat of a Greek restructuring.
• A Bloomberg poll suggests that 85% of investors anticipate a Greek restructuring…the Greek PM (Papandreou) is trying to push EU leaders to issue so-called “Euro bonds” which would essentially be joint and several liabilities of all EU countries…talk about moral hazard.
• Contango (higher price curve in out months) is rising in the natural gas market as Japan (the world’s largest user of LNG) will import record amounts in the coming year. With some 57% of its nuclear fueled electricity generation off-line following the Fukushima disaster Japan may increase imports of LNG by +13% in the next 12 months. Japan imported 70 mm metric tons of LNG last year (for those who like to think in terms of cubic feet that’s roughly 3.7 trillion cubic feet of natural gas… worldwide consumption of natural gas is in the range of 110 tcf) so a 13% rise is approximately another 500 billion cubic feet of natural gas. This is more inflationary for places like the UK (the world’s 3rd largest LNG importer) where the current price per mcf of natural gas is $11.32 or about 2.7x what we pay here in the states per mcf of natural gas.
Phillip Pennell, CFA
Turnberry Capital Management
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