Equity Markets – So far, trading today has been a mixed bag. Asia was mostly lower overnight as the World Bank trimmed its forecast for global GDP growth in 2012 by roughly 30% to 2.5% and stating that even this reduced level of growth was at risk subject to what happens in the EMU and the collateral damage that the debt crisis and consequent fiscal austerity moves cause to emerging market growth rates. Then this morning, European indices got a boost when the IMF said that it plans to boost its rescue fund by $1 trillion…of course this was initially tried at the end of the year and failed miserably as countries bickered over how much they would be willing to lend and what their consequent demands were in terms of gaining additional power in the international body that has always had a European at its helm. The news out of the US has been somewhat better as domestic demand continues to fill in for autos and the car makers have responded with additional work shifts at numerous plants as several years of selling light vehicles below scrap rates has begun to show up in the final demand numbers. We also got some additional hints that the Greek debt negotiations are targeting a net present value recovery of roughly 32% of face value. It remains unclear if this deal will actually happen or if it will happen but only after CDS are triggered making it essentially a pre-pack in which investors go along with a 32% recovery but they get to cash in their CDS along the way (this is my supposition at this point and not supported by any firm data). At this point, domestic futures are indicating a relatively flat opening in the face of a good deal of macro data and earnings (mostly from financials).
Macro, News & Events
Economic Releases – today’s releases will focus primarily on businesses with pricing data, production and capacity utilization getting the most attention…the net US Treasury inflow data will be interesting as well given how volatile the situation in the EMU was during December, we could large swings in this data over the course of the next couple of months. Finally, we also get some housing data.
• Weekly MBA mortgage applications…last was +4.54%
• December PPI (MoM)…+0.1% v. +0.3%
• December PPI ex – Food & Energy (MoM)…+0.1% v. +0.1%
• December PPI (YoY)…+5.1% v. +5.7%
• December PPI ex – Food & Energy (YoY)…+2.8% v. +2.9%
• November Total Net TIC flows…$50.0 billion v. -$48.8 billion (TIC is Treasury International Capital) so the projection is for a large increase in monthly inflows due to EMU debt crisis
• November Net long-term TIC flows…$40.0 billion v. $4.8 billion
• December Industrial Production…+0.5% v. -0.2%
• December Capacity Utilization…78.1% v. 77.8%
• January NAHB Housing market index…22 v. 21
• Federal Reserve Governor Tarullo will testify before the House Financial Services Committee on the proposed Volcker Rule and its potential impact on the economy, jobs, businesses and investors. Will also get testimony from the FDIC Chairman (Martin Gruenberg), CFTC Chairman (Gensler), SEC Chair (Schapiro) and Comptroller of the Currency (John Walsh).
Earnings – a number of “big” names report today including: Goldman Sachs, PNC, US Bancorp, eBay, Bank of New York, State Street, Northern Trust, Charles Schwab, Western Digital and the volatile F5 Networks. The big “winner” over the last twelve months in today’s group is Fastenal (FAST), up 56.6% this high flyer with a 33x P/E is looking for $0.29/share.
Asia, Europe & USA
• The IMF is proposing a $1 trillion increase in its lending resources to insure that it can deal with any potential global crisis. The fund is reportedly seeking the bulk of the new funds from the BRICS and OPEC countries as well as Japan. The IMF is looking to finalize the expansion at the Feb 25-26 meeting of the G20. The current size of the fund is $385 billion and the EU (ex-the UK) has pledged to contribute $192 billion to the fund. At present the US has said that it has no plans to make new bilateral loans to the fund and the G-20 ended 2011 at odds over the issue. We may get additional information out of the G-20 deputy finance minister meeting later this week in Mexico.
• Greece and the creditors committee are beginning final negotiations on a 32% recovery on their government bonds…Bruce Richards of Marathon said that he is “highly confident” that a deal will get done. Marathon serves on the committee made up of 32 private creditors.
• Man Group plans to eliminate jobs and reduce compensation in order to trim costs by 10% as clients opted to withdraw $2.5 billion in Q4. Total AUM was $58.4 billion at the end of 2011, down from $64.5 billion at the end of September.
• The World Bank trimmed its global growth forecast by the most in three years projecting that global growth will be 2.5% in 2012 down from an estimate of 3.6% in June. The EU is now projected to shrink by 0.3% (vs. 1.8% growth) and the US growth rate is projected to be 2.2% down from 2.9% in the earlier forecast. The World Bank indicated that even the reduced numbers bear a good degree of uncertainty depending upon the ultimate “knock-on” effects of an EU slowdown on emerging market economies.
• UK unemployment rate rises to the highest level in 16 years as of the end of November…the unemployment rate rose to 8.4% from 8.1% in the three months ended August. It’s the highest rate since January 1996.
• Moody’s raises the sovereign debt rating of Indonesia to investment grade…the country had been below investment grade since the Asian crisis back in 1998 when a number of widely traded Indonesian corporate bonds defaulted.
• Nyrstar NV the world’s largest zinc smelter said that it will spend $2.5 billion on mines to expand its footprint beyond zinc smelting…
• US auto plants have returned to running a 3rd shift to keep up with growing demand. The new 3rd shift operations have added 4,300 jobs at GM facilities in four states. It is now projected that US auto facilities may run at up to 81% capacity in 2012 after hitting a low of 49% capacity in 2009. The expanded production comes as US light vehicle demand rose at a double digit pace for two consecutive years for the first time since 1984 and the US auto market grew at a faster pace than the Chinese market for the first time in 13 years. The collateral economic impact in areas hardest hit by the economic slowdown will be significant as small businesses begin to emerge to service new pockets of consumer demand…there may still be hope for Michigan and Ohio.
• Germany cuts its 2012 economic outlook to 0.7% GDP growth, down from 1.0% growth estimated in October…expectations are that fiscal austerity will cut German exports to 2% growth in2012 down from 8.2% in 2011.
• Options traders are increasing bullish bets on Chinese banks based upon the assumption of monetary easing to come…
• $33 billion of asset sales at Bank of America in 2011 may trim as much as $2.8 billion from the income statement in 2012…concerns at this point are that if losses due to mortgages accelerate, the firm will have to sell core assets or potentially breakup the business, sell or spin-off Merrill Lynch for example.
• Renewable Energy Group Inc., a maker of biodiesel will test the IPO for “green” energy as it tries to raise as much as $108 mm selling 7.2 million shares…the company hasn’t made a profit since 2008.
• So far, the calendar Q4 earnings season has begun with a thud as only 47.1% of companies that have reported earnings since the beginning of December have exceeded expectations. You can argue that there is a certain bias to these numbers as most of the reporting firms in early December were late fiscal 3rd quarter reporters which mostly constitute retailers and others that may have put off announcing earlier in the quarter because they had bad results. Regardless, this is at least something to pay attention to as we move into the heavier reporting days for fiscal Q4 earnings.
Credit Markets –
Sovereign CDS – markets are mixed but a clear bifurcation appears to be taking place…Greece bid/offer is tightening around the recovery rates currently leaking out into the press (32% of face)…Portugal is widening again as macro concerns come back into focus and expectations that Portugal is the next “Greece” grow…other spreads appear to be benefitting from the attempt by the IMF to grow its rescue fund.
CDS Contracts – the weekly numbers suggest that traders are “squaring off” positions as net contract exposure declines for the most part while gross contract exposure expands everywhere except in the US…this likely suggests that the TIC flows into the US may be even greater than projected as investors rush to the safe haven of US Treasuries which would explain the run up in both US equity markets and US Treasury markets to start the year.
US Corporate Credit – US high yield indices once again outperformed the rest of the corporate credit default swap market yesterday as spreads tightened by 18 bps on the HY CDX vs. 2 bps of tightening on the investment grade CDX and 7 bps of tightening in leveraged loan CDX
Energy Markets – WTI is up by 0.7% this morning and comfortably back over $100/ barrel as the spread between WTI and Brent shrinks under $11/barrel…given the cuts in the World Bank’s economic outlook this suggests that there remains a hefty geopolitical premium in Brent as the tensions with Iran continue…an Iranian toymaker has said that it will send a model replica of the US spy drone that was captured in Iran to the President since he “asked for it back”. Questions about Iran’s ability to close the Strait of Hormuz remain…while a report commissioned by the administration suggests that the US could reopen the strait within weeks, it could result in a shooting war with the Iranians. In my estimation that would probably be a better result sooner rather than later.
Natural gas futures still remain well below $3/mcf all the way out to October…until we get additional indications of a US manufacturing revival and some colder weather as well as gas wells being shut in en masse it will be tough for gas to get off its back in the near term.
Phillip Pennell, CFA
Turnberry Capital Management
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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.