@ the open 3-6-12

Beware the ides of March – perhaps Shakespeare had the markets of the last several years in mind when he penned Julius Caesar…the Market could be Caesar saying “the ides of March have come” to which the seer replies “Ay, Caesar but not gone”…we’ve had issues crop up over the last several years in March with the market bottom in ’09 / the realization that the EMU was in deep trouble in ’10 / the earthquake / tsunami in Japan ’11 and now this year…equity markets are beginning to pay more attention to the possibility that a slowdown in global growth rates could be once more just around the corner following the Chinese announcement that they will trim their growth target rate, worsening purchasing managers numbers out of the EU, unexpected declines in retail sales in Germany, rising crude prices and ongoing violence in Syria which threatens once again to draw the West into a growing civil conflict, this one with an Iranian ally and Israeli neighbor.

________________________________________
Equity Markets – continued concerns about growth in China led a selloff overnight as the Hang Seng fell 2.2% and it’s spilled over to European markets this morning as news starts to come out with regard to the Greek debt exchange (so far 20% of the total has agreed to the debt exchange)…markets on the continent are at or near their lows for the session and automakers join the chorus of those voicing concern about the potentially optimistic prognostication that EMU GDP will only shrink by 0.4% this year…the general consensus on the vehicle manufacturer front now appears to be a -5% year which would be the 5th consecutive year of declining vehicle sales. Here in the US, I expect more focus on Friday’s jobs report as some in the press are arguing that another +200k job creation month should send the market ever higher but as Chris pointed out yesterday, “doesn’t everyone expect this already”…could lead to a sell the news event on Friday regardless the outcome…good hunting.

________________________________________
Macro, News & Events

Economic Releases –

1630 – March 2nd API US Crude oil inventory level…prior week was +521k barrels (barrels are equivalent to 42 US gallons)
1630 – March 2nd API Cushing (OK) Crude oil inventory level…prior week was +1,639k barrels
1630 – March 2nd API US Distillate Inventory level…prior week was -3,311k barrels
1630 – March 2nd API US Gasoline Inventory level…prior week was -916k barrels

Events – no events on the calendar today

Earnings – no earnings announcements for the S&P 500 today

Asia, Europe & USA

• Private investors that have committed to the Greek debt exchange control roughly 20% of the bonds (€40 billion) that Greece wants to ultimately exchange…there’s still a couple of days to go
• The IMF announced that their “baseline assumption” remains that Portugal will be able to access the private capital markets in 2013 in order to refinance their maturing debt and that there will be no losses for investors…not a bet that I’d want to make
• PSA Peugeot has announced plans to sell shares in a bid to increase their capital levels by €1 billion…the share sale will be at a whopping 42% discount to yesterday’s closing price. PSA is giving existing shareholders the right to buy and additional 0.516 shares for each currently held share at the discounted price. The share sale follows the 7% investment in PSA by GM announced last week…31% of the shares have already been placed with GM and the Peugeot family.
• Automakers are prepping for a deeper slump in European auto sales following initial deliveries this year to the continent which were at the low end of expectations…several manufacturing representatives are saying that the market has deteriorated from assessments made only a few months ago. Current expectations are for a decline of 5% in vehicle demand in Europe which would be the 5th consecutive annual decline in demand there.
• The best performing segment of the energy transportation sector may end up being MR tankers, the smaller refined product carriers…last year, rates were up 29% and with the US exporting refined products (gasoline and distillate) investors like WL Ross and John Fredriksen are ordering more of these tankers even as the market for large crude carriers remains in decline.
• It’s “super Tuesday” for the Republican primary race…
• Key backers of the Syrian government (China and Russia which both have UN Security Council veto power) are backing away as the violence in country escalates…McCain calls for US led airstrikes similar to those used against Libyan strongman Qaddafi last year.
• After the Greek debt exchange is in the rear view mirror, one way or another, the focus will quickly turn to Ireland which will hold a public referendum on the new “fiscal pact”…the new pact will require governments to keep deficits below 0.5% of GDP, with exceptions granted for exigent circumstances but Irish voters could view this as a constitutional power grab from across the channel and ultimately decide that “enough is enough” and vote no on the agreement. A no vote by Ireland wouldn’t impact the agreement itself, it would just distance the country even more from the EMU and likely exclude it from any additional EMU financial support should that become necessary. This makes the likelihood of a “no” vote a low probability.

________________________________________
Credit Markets –

Sovereign CDS – spreads in Europe are modestly wider this morning in sympathy with the equity market sell-off and I’d expect them to widen further should the current market downward momentum continue. The biggest driver of uncertainty remains the Greek debt exchange which will wrap up Thursday…so far 20% of the targeted €200 billion in Greek bonds have been tendered in for the exchange and the Greeks have set a 75% threshold to go forward with the deal and the “Greece II” bailout is predicated on getting this deal done…look for an 11th hour resolution as this latest crisis has seemingly drawn out the battle to the very end at each and every step.

US Corporate Credit – corporate CDS indices were wider with the equity market down yesterday…high yield underperformed the other indices and ended wider by 15 bps (+566) while the loan index was wider by 7 bps (+296) and investment grade was wider by 1 bp (+95).

________________________________________
Energy Markets – oil markets are lower in sympathy with equities…WTI remains around $17 / barrel cheaper than Brent. Meanwhile, with the euro trading lower the price of crude in euro terms has now surpassed the 2008 peak in the $ market ($144.42/barrel) for Brent which now stands at €93.46 / barrel (back in ’08 it was €91.97 / barrel)…more weight on those narrow shoulders…violence continues in Syria and the drumbeat is rising to launch the fighter/bombers as were employed against Qaddafi…once the genie is out of the bottle it’s tough to put it back in and Russian and Chinese opposition to UN Security Council action appears to be wavering.

Futures – the energy equivalence ratio is heading toward 6.2x as natural gas continues to “out fade” crude oil in the futures markets. As this ratio expands you can look to political forces to begin to line up on both sides of this issue and with unemployment still at unacceptable levels, especially given the lousy participation rates in the labor market, it will be difficult for any politician, no matter how “green” they are to stand up against the obvious which is that US energy policy has to focus on taking advantage of the ocean of natural gas that we now enjoy. It may be our best competitive advantage going forward as technology could once more rescue us from the threat of becoming yet one more “tick mark” in the timeline of human development.

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.