Equity Markets – Markets were mixed in overnight trading out of Asia as Japan released disappointing Q1 GDP numbers (see below), European markets are near their highs for the day in the morning session after the statements released by the ECB (see below) suggest that a Greek debt restructuring will not work in their estimation, US futures indicate a positive open as the news from Europe would certainly suggest that the risk trade could be back “on”.
Oil Markets – US gasoline futures are headed for the biggest monthly decline in a year as demand shrinks in the face of rising prices and refiner bring plants back on line after maintenance outages were essentially forced in the Gulf region because of the flooding along the Mississippi River. Consumption for the 4 weeks ended 5/13 was down 2.3% year on year and prices were down 15% in the biggest decline since May 2010 (this was following EU debt crisis I). Wildfires in Alberta are constraining the flow of crude south shutting the Rainbow pipeline system (Plains All American Pipeline LP) but it appears that firefighters may be gaining the upper hand. Canada was largest source of crude oil last year to the US at 1.97 million bpd. This morning, WTI is up $0.34 / barrel to $100.46 per barrel which would work out to an average retail price across the country of $3.70/gallon at the pump.
Earnings News – we get a mix of technology and retail earnings today…Sears disappointed this morning reporing much worse than anticipated EPS (-35% surprise) but sales were better than expected (sounds like a highly promotional quarter for the troubled retail chains of Sears and K-Mart). We’ll also get numbers from discounter Ross Stores (likely to beat estimates), Gamestop and Gap…on the tech side we get Intuit, Autodesk and Salesforce.com
US Economic Releases – if it’s Thursday it must be jobless claims day…today we get initial and continuing jobless claims for the week (continuing claims are on a one week lag)…the market is expecting weekly claims to remain above 400k at 420,000. We also get data on mortgage delinquencies and foreclosures for Q1 as well as existing home sales (expected to be up 2% month over month) and the index of Leading Economic Indicators for April (expected to be +0.1% vs +0.4% in March). Finally we’ll get the Philly Fed Index of indicators for May with the market expecting this number to come in at 20, besting last month’s reading of 18.5.
• DSK resigns and now the game will begin as the we await his successor at the IMF helm. Most economists/strategists seem to agree that a successor needs to be selected quickly so that there is no perceived void in leadership that the market could perceive as uncertainty about how the IMF will react to the European debt crisis. That would seem to argue for a European candidate but the countries with the two largest voting shares are the US and Japan and they haven’t backed any specific candidate yet. If it’s going to be a European then Legarde most likely would be the logical person as there has never been a female leader of the IMF and that would represent some change…although still unlikely to satisfy the emerging market economies…stay tuned.
• Japan released the official figures for Q1 GDP (-3.7%) which showed that the decline was worse than anticipated as the Japanese economy officially has now racked up back to back quarterly declines in GDP following the Fukushima Dai-Ichi nuclear disaster and the devastation wrought by the 3/11 earthquake and tsunami. Investors shunned utility stocks as the government hasn’t decided how to deal with the spreading the cost of the nuclear meltdown at Fukushima (still not completely under control) and the uncertainty is just too great. While the Nikkei was down in the trading session it certainly wasn’t routed as the Yen weakened in anticipation of stimulus of some sort to both pay for the cleanup and stimulate the rest of the economy and with an export driven economy like Japan that is best accomplished with a weaker currency.
• In other Japanese related news, the cost to ship goods into the country is increasing as ships want to avoid the Eastern coast of Japan and the radioactive waters fearing that it could taint the vessels for use in other ports. This will ultimately become an issue for Japanese exports as well as countries will likely begin monitoring the radioactive status of all shipping vessels entering ports after having docked in Japan. Nice, slow down the flow of goods internationally as ship hulls get tested with a Geiger counter another potential drag on worldwide GDP.
• It appears now that the first step in a Greek debt “restructuring” could be solely on a “voluntary” basis. This expectation comes following word out of the ECB that the central believes that a forced and uniform restructuring is not appropriate and will not work. This is in direct conflict with the political jawboning that has proposed forcing all Greek debt holders to take a haircut…so would you volunteer to get your payment at maturity from the Greek government later than it was originally scheduled? Of course you can guess the answer to that question with the exception of maybe the ECB held securities (this is where the new ECB chief will come in after Jean Claude Trichet leaves in the fall). Why make it voluntary you ask? Simple, if it’s voluntary and not coercive then the credit default swaps do not trigger (i.e. it isn’t considered and event of default) and the banks that have written the bulk of the insurance don’t get hit with an insurance coverage bill (once again, it’s all about the banks). So who’s this bad for…the core EU nations debt spreads most likely. Once investors see that there will be no mandatory restructuring on Greece then they’ll start buying up the paper at 25% yields for 5 year maturities counting on the rest of the EU to continue to bail out the Hellenic republic and they’ll pay for the purchases by selling German paper (as well as other more credit worthy states). This is the joint and several liability framework in stealth mode.
• Banks in Spain are reportedly considering bundling unsold homes and land to sell to investors in order to reduce the risk of additional real estate related losses…it is anticipated that the discount will have to be at least 40% off of book value to generate interest. In other news, Spanish government debt prices declined as sales of 10-year bonds at auction brought in only €3.2 billion instead of the planned for 4.0 billion.
• In other EU debt crisis related news, the EFSF/ESM (Europe’s two bailout funds) indicated that they will sell €15.3 billion in bonds between May 23rd and July 15th to help fund the bailouts of Portugal and Ireland.
• Don’t look now but Argentina is in real fiscal trouble and it’s getting worse. The South American country remains “locked out” of the international debt markets (the result of the 2001 debt default) and now their hard currency reserves are dwindling, posting the first decline since 2002.
Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
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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