@ the open 9-7-11

Equity Markets – Asia rallied overnight and Europe is up smartly following the release of the factory output numbers in Germany (+4%) and the high court ruling that essentially rubber stamped the previous bailouts but put a roadblock in front of any deal that would create an open spigot from Germany to the rest of the EU (no surprise there). The European indices are near their highs for the session and the domestic futures signal a “plus” opening here indicating that given yesterday’s late rally into the close it appears that we’re going to skip the near 4% down day that Europe took on Monday while we were on holiday. It’s unclear to me at this point if the market has fully digested the future implications of the Germany high court ruling. Remember, Germany wanted what amounts to a “veto” on any additional bailouts going forward and that would’ve been / will be protested across the EU…now the high court has given the Parliament their robes to hide behind as the chancellor can now say “hey, we have to run everything by our budget committee…it’s our law”…one word for this kind of chicanery...pathetic.

Macro, News & Events –

• Today we get the Federal Reserve “Beige Book” (collection of anecdotal economic data from around the Feds regional banks) as well as the JOLTs (Job Openings and Labor Turnover) report for July…the survey calls for a reading of 3074 down from 3109 for June.
• The German high court has ruled that the actions to date on the bailouts, loan guarantees for the EFSF/ESM and other actions taken by the German government to help stabilize the situation in the EU were done within the confines of the German Constitution. However the court also said that their ruling didn’t constitute a blanket ruling and that any future actions would have to be passed by the budget committee of Parliament…that’s good and bad, the good is that it just has to pass the committee, the bad is that everything has to be signed off on so this is a classic incrementalist German control freak ruling.
• German industrial production was up the most in more than a year as factory output jumped 4% from June (the largest sequential increase since March ’10)…the Bundesbank reiterated their 3% “area” forecast for GDP growth.
• US banks increased their corporate lending by the most in three years in August. C&I loans through the end of August were up 1.49% that’s the largest jump since October 2008. Lending standards have been reduced given the outlook for corporate profits but are still tight by historical standards. The darker side of this number could be that it’s simply high yield companies that wanted to issue bonds but were shut out of the market and consequently drew on available revolving credit facilities until the bond market opens to them again at which time they’ll issue debt in the public markets and repay the revolver.
• That didn’t last long…Saab is seeking protection from creditors for the second time in two years (known as “Chapter 22”)…haven’t seen this since US Airways
• Rumors surfacing that the job plan from POTUS slated for tomorrow night release will call for another $300 billion of stimulus in 2012 via tax cuts as well as direct aid to state and local governments and will call on congress to raise taxes in the out years to pay for the new stimulus package…this sounds like a “half-measure” to me that will likely be met with tepid support at best…he better hope that this rumor is a red herring.
• Merkel in a speech to the German parliament said that “strict” terms for bailout aid is the only way to calm the market turmoil…she once again dismissed a joint and several “common bond” as the “wrong answer” to the current challenges. It sounds like the Germans want to wait the market out and see what happens, on the heels of the current recovery in Germany it’s easy to see why the Germans would like to take a myopic view of the situation…they may not have to wait long.

The PIIGS – the table below highlights the problems faced by Spain and Italy (large amounts of debt to roll remain in 2011) then there the problems of Greece and to a lesser extent Portugal (high debt to GDP ratio and a lousy growth outlook). In any case it becomes obvious fairly quickly why concerns about growth and it’s consequent impact on the ability to pay are swirling around the EU at present. This is especially true for Italy given the overall size of its debt load and the impact that widening spreads have on the interest payments.

Credit Markets – we’ve gotten a little bit of a rally going in sovereign spreads but this isn’t enough to pull in the SOVX below 300 basis points…remember way back in June when the market thought that +250 was wide? A ruling like what came out of Germany this morning combined with the German growth numbers would have sent the spreads gapping down…not anymore. The credit markets look like they’re setting up for a full on revolt and there appears to be good reason…this is starting to appear like a “sure thing”…the Germans are going to drag their feet until some country or bank is 49.999% off the edge of the cliff before they decide to act and it could be too late by that time so I don’t really see anything happening at the moment to quell speculation that more dislocation, volatility and spread widening is coming and with the current revolt going on in Italy over the austerity package, that seems like as good a place as any to start…the Italians are putting their austerity package to a vote today and it will be a “confidence vote” on Berlusconi. Most see a downgrade of Italian debt coming and unlike in the US this doesn’t seem destined to improve demand.

• US banks have reported growth in C&I loans in the last month but it’s likely that this simply reflects the shuttered bond market

Oil Market – WTI is up almost 1% over yesterday’s close as the spread with Dated Brent narrows slightly to just north of $26 per barrel...i continue to believe that this spread has to narrow.

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
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The information included in the above discussion is not intended to be used as a basis for making investment decisions nor should it be construed as a recommendation by the author to buy or sell any specific security. Individuals should consult their investment advisor prior to making any investment decisions.