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At the open 5-17-11

Equity Market – overnight trading in Asia was mixed with only the SENSEX and the All Ordinaries making much of a move either way…Europe appears to be following suit with the market trying to digest the recent spate of events from the arrest of Strauss-Khan to the EU finance ministers openly discussing a debt maturity extension for Greece (see below) and the potential outcomes of parliamentary votes on the Portuguese bailout…US futures indicate a flat opening.

US Macro Releases – today we get data on housing starts, building permits, industrial production and capacity utilization for the month of April. The survey is looking for 569,000 housing starts (annualized basis) for April and 590,000 building permits both slightly higher than the annualized readings for March. Industrial production is expected to climb by +0.4% vs. the +0.8% increase in March (much of which was influenced by February weather) and capacity utilization is expected to remain virtually unchanged at 77.6% utilization vs. 77.4% in March.

Earnings Releases – again it’s a relatively light day on the earnings calendar as we trudge toward the end of Q1 earnings releases. So far this morning Home Depot and Wal-Mart have announced earnings that bested analyst expectations although Home Depot missed the analyst revenue estimate…this continues to bear testament to the difficult situation in the housing market and the impact of higher commodity prices. Wal-Mart beat on sales by a whopping 1.2% and tells me that shoppers are still out there and haven’t completely forsaken the every-day low price format…again this could be an indication of higher commodity prices forces more consumers toward the lower cost “warehouse style” retailer chains. Later today we get earnings from Hewlett-Packard, TJ Maxx and Dell

Oil Market – oil inventories rose to their highest level in two years as declining demand for fuel slows refinery operations and forces more oil into inventory. Demand for oil in the US declined 0.9% in the week ended 5/6/11 leaving demand at 18.2 million barrels / day which is the lowest demand level since June 2009 (at that time prices were around $70 / barrel for WTI)…the flat futures curve has also driven the arbitrage out of storing oil in supertankers anchored offshore at cost of $42,000 per day which also then puts additional downward pressure on the commodity. At the first sign of slowing growth in Asia prepare for another leg down in oil prices barring a significant supply disruption from the MEAN.

European Credit Market – credit spreads on the derivatives markets continue to show modest improvements as EU finance ministers firm up the terms of the Portuguese bailout and discuss new potential actions to solve the Greek debt crisis…Ireland remains in the background for now. Frankly, I’d expected more tightening of spreads and perhaps that comes following the individual votes on the plan to bailout Portugal…this suggests to me that the new “normal” on Portugal and Ireland is around +6% spread and the spread on Greece will likely remain around +12% until the next steps in the return to financial stability are firmly established. All of this says to me that we may have determined a new “bottom” on the SOVX of around +1.70% or 170 basis points up from the prior +150 to +160 base.

News –

• UK inflation in April rose at the fastest rates since 2008…not surprisingly when the last oil price shock happened…once again, King had to write a letter to Mr. Osborne (Chancellor of the Exchequer…think Treasury Secretary) explaining what’s going on and why the Bank of England has not raised short term rates in response to the increased inflation. Both King’s letter and Osborne’s response letter will be released this morning. Consumer prices in April were +4.5% following a +4% change in March…that’s well above the BoE’s target rate of 2%. The fear continues to be “stagflation”…not seen since the early 80’s…in which inflation occurs simultaneously with high unemployment levels.
• EU finance ministers met in Brussels yesterday and for the first time are publicly debating the merits of extending the maturities of existing Greek debt and admitting that last year’s €110 billion bailout has failed to restore financial stability in the Hellenic Republic. Luxembourg PM Jean-Claude Juncker indicated that the EU would be willing to consider a “reprofiling” of existing bond maturities if Greece will agree to faster (and likely larger) sale of state assets and additional austerity moves…it appears that this is the EU’s move to toss the ball to Papandreou and see what he does with it. This is clearly a break with the previous indications by EU finance ministers that there would be no write-down of debt until a permanent fund (ESM) had been setup in mid-2013 and then only as a last resort to cure insolvency issues for a particular issuer. This is a clear signal that the EU/ECB is running out of options on how to deal with Greece. So clearly, regardless of what Christine Legarde or Didier Reynders says (Finance Ministers of France and Belgium) about a Greek restructuring, the genie is now out of the bottle and the only real question that remains is who’s next?
• Yesterday’s Finance Minister meeting also discussed the Portugal bailout situation (€78 billion over three years). The loans will be done in two tranches and priced at borrowing costs + 2.15% and borrowing cost +2.08%. Portugal is promising deficit cuts and the sale of state owned assets and will “encourage” private investors to continue to hold Portuguese debt on a “voluntary basis”…sounds like handing out some tax advantages could be in the cards. The aid package to Portugal still requires approval by all EU governments and most will put it to a vote in their respective parliaments…it will definitely be interesting to watch Finland.
• German investor confidence declines for a third month as inflation and the ongoing sovereign debt crisis threaten consumer spending and economic stability of the EU. The index which is designed to predict economic development 6 months hence fell to 3.1 in May from 7.6 in April. The decline was significantly worse than expectations of 4.5.
• DSK sits in a cell on Riker’s Island as the rest of the world’s finance ministers debate who should run the IMF after Lipsky steps down in August…the sides are lining up and on one side you have the status quo vote in a European contingent and on the other side you have the bring in some new blood and vote in an emerging markets representative…the debate should be interesting.
• If you wondered what might happen with regard to Pakistani relations following the SEAL mission to eliminate bin Laden…look no further as a border post on the Afghanistan/Pakistan border opened fire on two NATO helicopters that they claim were in Pakistani airspace…the guards were wounded when the helicopters returned fire.
• The situation worsens in Syria as reports of discovery of a mass grave containing the bodies of anti-government protesters drove protests outside Damascus…Syrian forces have killed at least 850 protesters during the two-month protest that appears ready at any time to turn into all out civil war.
• HPQ CEO Leo Apotheker has reportedly told executives that the company’s fiscal 3rd quarter will be challenging and that they should “watch every penny and minimize all hiring” and that there is “no room for profitless revenue or any discretionary expenditures”…this gives some insight into what’s going on in corporate America as I doubt that this is completely unique to Hewlett-Packard.
• Global demand for food will likely continue to drive inflation for many emerging market countries in which food is a large percentage of disposable income…harvests damaged by drought and / or flooding have failed to keep pace with growing demand from the 3rd world and consequently grains are heading higher. Many analysts think that corn is poised for the largest gains in the grain complex.

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

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