@ the open 1-27-12

Equity Markets – European indices are at or near their highs for the session which gives you some idea of how the morning has gone. With the fade in the equity market rally in the US yesterday

It isn’t surprising that the European indices are waiting to take their cues from what goes on here today, especially with Q4 GDP numbers coming this morning at 0830. The US market is trying to decipher worse earnings numbers, an as yet unresolved Greek debt exchange, a looming follow on sovereign crisis situation in Portugal, an uncertain political solution to the debt crisis with the new “fiscal pact”, growing concerns about the future of Japan as their surplus fades. So all of these uncertainties remain out there BUT, what is certain is that the ECB is flooding the EMU with liquidity and appears ready to do more at the end of February when the next LTRO “auction” will take place so while we all know that these problems remain unresolved and must be answered in the long run, we are buoyed by the fact that there won’t be a meltdown any time soon…if ever. DON’T TAKE THIS FOR AN ALL CLEAR…I continue to view this situation as a long term “slog” through the swamp of austerity, currency devaluation and ultimately inflation then rate hikes to control the inflation. As such, I think that we remain in a trading range… over the last 210 trading days, which takes us back to late March 2011 after the quake / tsunami, we’ve seen an intra-day high of 1363.62 on the S&P on April 29th (the closing high was May 2nd) which was threatened in July (twice) but was lower each time…then threatened again this week. So, bottom line, over the next couple of weeks, the way that the market trends will give us the answers of whether we’re threatening a higher move or just retesting the last highs of the market from last summer only to disappoint and roll over once again. I’m holding onto my market short positions here…just in case.

Macro, News & Events

Economic Releases – this morning (0830) we get the initial release of Q4 macro data for the US economy and the consensus expects the growth number to come in at +3.0%...recall in Q3 the initial release was over +2% only to be ultimately adjusted down to +1.8% for the quarter.

• Q4 GDP (QoQ / annualized)…+3.0% v. +1.8% (this is the initial release to be followed by updates)
• Q4 Personal consumption…+2.4% v. +1.7%
• Q4 GDP price index…+1.9% v. +2.6%
• Q4 Core PCE (QoQ)…+0.9% v. +2.1%
• January UofM consumer confidence index…74.0 v. 74.0

Events –

• Federal Reserve Bank of New York President Dudley will speak at a press conference on the local economy in Manhattan this morning at 1000

Earnings – a smaller slate of earnings announcements today as it’s a Friday but the few that are reporting include: Ford, Procter & Gamble, Chevron, Honeywell, Altria and DR Horton. To date, 31% of the S&P 500 companies have reported and the year over year reported earnings growth has been +3.64% with the surprise coming in at +3.89%...earnings growth is lagging well behind the double digit rates of growth put in through the first 9 months of 2011 as the impact from and reaction to the European sovereign debt crisis and potential global slowdown leaned hard on economic activity in Q4.

Asia, Europe & UK

• Unemployment rate in Spain rose to 22.9%, more than expected to the highest level in 15 years (pre-dates the common currency). This places additional pressure on newly elected PM Rajoy to change labor rules (reform) and get the economy growing again…unfortunately for Spain they face a banking crisis not terribly dissimilar to Ireland (except that their banks didn’t load up on toxic securitizations like the large Irish banks did) and until they can settle on a “fix” for their banking system it will prove difficult to get their economy moving again.
• EU Economic and Monetary Affairs Commissioner Rehn said that the parties were close to reaching a deal on “private-sector involvement” (PSI) over the Greek debt exchange…”the next three days will be very crucial…”. Rehn also said that “…PSI won’t be applied to any other country of the euro zone”…as Portuguese spreads continue to widen well past 1,300 basis points.
• Italy auctions €8 billion of 6-month bills at 1.97% (156 basis points lower than the previous auction yield)...the bid-to-cover ratio was lower at 1.4x vs. the previous 1.7x…the Italian government also auction off €3 billion of 1 year paper for 2.214%
• Russia will likely scrap a planned 20% tax on Eurobond interest after issuers of the debt complained about the tax which would’ve cost issuers $1.5 billion per year on the existing Eurobonds outstanding and likely killed the market for additional issuance going forward.
• Petrobras expects to have some of its credit lines “pulled” by European banks that are trying to trim liability exposure and boost capital levels…the company indicated that it will seek “new sources” of funds in the event that any of its credit lines are pulled.
• Italian PM Monti’s Cabinet is set to approve measures that will cut red tape in the Italian bureaucracy as the PM seeks to reform the country to stimulate growth and save it from the fate of its southern neighbor, Greece…the moves seek to abolish hundreds of laws and simplify rules that regulate companies and new business ventures. After this the next step is to reform the country’s rigid labor laws…negotiations on this front have already begun and the government hopes to have an agreement within a month.
• IMF managing director Legarde continues to pressure private creditors to improve their offer in the Greek debt negotiations…this process is becoming much less “voluntary” and essentially makes a joke out of the concept of a non-coercive debt exchange.

Energy Markets – only modest changes to global oil prices this morning as the market awaits the US Q4 GDP report…

Natural Gas – gas futures are fading a bit this morning from yesterday’s levels when the one year futures strip average price was $3.15. the fundamental problem of too much supply for too little fixed demand (i.e. 24/7/365) leaves the natural gas market in the US still largely weather dependant awaiting completion of more liquefaction facilities that can ship LNG from the Gulf coast to Europe and Asia…the widening of the Panama canal will help as well.

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.