@ the open 1-23-12

S&P 500 – for those of you who like to look at charts and try to figure out market trends, we remain firmly in the middle of the “channel’ put in back in 2009…we’ve increased roughly 639 points with an intraday high of 1361 back on May 2nd 2011. From that point, we retraced 262 points to the low of 1099 on October 3rd 2011. The typical ½ move retracement would suggest that we’re due at some point for a pull back all the way to 1019 but for the time being that appears to be some ways off as the market prefers to focus on the improving economy in the US and inching forward of the EMU negotiations on Greece and the “fiscal pact” designed to keep a lid on the sovereign debt crisis.

Equity Markets – markets in Europe are at their highs for the day following an announcement that the creditors in the Greek debt exchange have made their final offer which will not be improved. This places the decision in the lap of the EMU and IMF leadership which has been pushing for a lower coupon on the new debt. It appears that most observers believe this to be a negotiating tactic to bring an end to the discussions. Markets across Asia were closed for trading due to the Lunar New Year holidays. Domestic futures markets are higher in sympathy with European trading

Macro, News & Events

Economic Releases – there are no releases on the slate today

Events – there are no events today

Earnings Announcements – relatively light calendar but there should be interesting commentary from Texas Instruments, Halliburton and CSX

Asia, Europe & USA

• Financial markets are closed across much of Asia as the Lunar New Year kicks off…snow and freezing rain across much of the Chinese mainland has created a logistical nightmare for those traveling for the holiday
• Germany continues to oppose calls to boost the size of the EFSF/ESM according to Steffan Seibert, spokesperson for the German Chancellor
• The Greek debt talks drag on with rumors of both a breakdown in negotiations as well as an imminent agreement…the sticking point appears to remain the interest rate on the new debt instrument. It was originally indicated to be between 4 and 5% with negotiations reportedly placing the final number around 4 ½% (not surprising)…now it is being reported that the Germans and the IMF want the rate to be 3%. If true, this doesn’t surprise me as the EMU leadership has tried to re-trade this deal from the very beginning…remember the original “plan” called for a “haircut” of 25% and now it looks like the end result is going to be closer to 70% and that still isn’t good enough…
• EMU finance ministers meet today in Brussels to hammer out terms for the new “fiscal pact”…of course with the Greek debt exchange ongoing it remains unclear if anything else will really be discussed. Most view the break-up of the EMU as unlikely given the logistical costs associated with leaving the euro…for the market, this means that in the end most if not all of the current members of the EMU will likely remain in the euro but it doesn’t tell us much about what will happen in the intervening period
• European banks appear likely to return to the LTRO “window” when the next “auction” occurs on the 29th of February. Last month the banks took €489 billion in three year repo. Draghi has indicated that he continues to expect elevated demand although less than in December
• Traders cut bullish crude oil positions after the EU delayed sanctions against Iran…the delay reduced the geopolitical premium that has been built into Brent (although it isn’t completely gone). EU foreign ministers will meet today to discuss plans to “phase in” the embargo of Iranian crude.
• Apache will by privately held Cordillera Energy Partners III for $2.85 billion in cash and stock…the acquisition will reportedly add 18,000 bpd of oil to current production and an estimated 71.5 mm barrels of oil equivalent reserves mostly in shale and tight sands
• With expectations for improvements in the US housing market, the Georgia Gulf acquisition by Westlake Chemical will likely have to re-price as the stock is trading 15% higher than the original takeover price of $30 for the maker of PVC products heavily used in residential construction
• India’s level of inflation in manufacturing prices is keeping the country from being able to cut rates to spur additional growth…non-food mfg prices rose 7.72% in December which outpaced the rise in the wholesale price index of 7.47%.
• The UK has come up with a plan to reduce down payments on homes to 5% in an effort to boost the housing market…they evidently learned nothing from our housing market lesson
• A strike by truckers and cabbies in Italy has led to traffic jams across the country as PM Monti presents his restructuring plan for Italy, which is designed to spur growth and competition, to other EMU leaders today. Opposition to structural reform in Italy has a long history and this time will likely be no different…

Credit Markets –

Sovereign CDS – spreads are modestly wider this morning as the Greek debt exchange appears to be nearing an end…transportation strikes have snarled traffic across Italy as PM Monti prepares to disclose his restructuring plan to the EMU leadership and Germany has once again said that it is opposed to increases to the size of the EFSF / ESM.

Overnight – overnight index swap spreads are slightly tighter with the difference between spreads in euro vs. spreads in dollars currently trading around -35 basis points. Even though spreads have improved it apparently hasn’t brought the market back as European banks continue to shun the capital markets in favor of using the extended repo facility (LTRO) provided by the ECB. The next “auction” for collateral will be at the end of February and expectations are that demand for funds will once again be high (489 billion euro were borrowed in the December auction) as the ECB expands the list of assets that it is willing to accept as collateral for the loans.

Energy Markets – WTI is up about 0.6% in sympathy with improvement in the equity markets this morning and the news that the EU will scale into an Iranian oil embargo over the next six months.

Natural gas futures continue their slide with November futures price now firmly below $3 / mcf and the average futures price over the next year at $2.71 / mcf. While providing lower costs for energy consumers in the US, the lower prices will ultimately force higher cost gas producers to shut-in production and could bring consolidation to the industry as liquidity constraints brought about by the lower prices and reduction in loan borrowing bases force some to sell reserves to survive. Cash will be king for natural gas producers in 2012.

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
(203) 917-2255 (Mobile)

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.