In equity markets, Asia was mixed in overnight trading…Europe is higher in the morning session while domestic futures indicate a more or less flat opening for markets here
• The process of releasing information regarding the Federal Open Market Committee (FOMC) decision on short term interest rates will change today…historically the rate decision (widely anticipated to remain unchanged at a target level between 0% and 0.25%) was made public at 2:15PM…today it will come out at 12:30PM and then Chairman Bernanke will give a press conference at 2:15PM…this could be interesting. In other economic releases we get durable goods orders and shipments for March…expectations are for a significant improvement over the February levels due to both improvement in the overall economic situation and the improvement in the weather.
• Here’s what I view as a real conundrum…the US Dollar continues to slide against the Euro, now down 7 sessions in a row in currency trading for the first time since 2009. The factors effecting both currencies are numerous but frankly, I view the problems faced by the EU as more intractable…clearly the market disagrees, at least for the time being. Consider the following:
1. Spreads on Portuguese debt have expanded to their widest level since the euro came into being…not only that, they closed yesterday at levels that are wider than the highest seen by Ireland…the country has debt equivalent to 20% of GDP coming due in 2011 and 2012 because they’ve had to use the short term debt markets to finance their economy. Remember, Portugal wants a bailout but it currently is without a government and there are no official terms yet for their bailout.
2. Greece faces similar issues related to their use of the short term debt markets over the last year and Greek short term debt is now trading with yields well above 20%...the market views Greece as a clear near term restructuring candidate.
3. The big holders of this “PIG” paper are the European banks…so the EU/ECB can’t really afford to just say “hey, take a 60% write-off on your Greek & Portuguese debt” since the investors are the ECB and the banking system…so they drag their feet and come up with the convoluted plan whereby every country will agree to bear their pro-rated share (or something akin to it)of a “European stability mechanism” (ESM)…the problem here is that some countries are paying in just to take money out (Greece, Ireland & Portugal) and some are saying we don’t want to support this type of facility and we’ll change out our politicians to prove it (Finland and to a lesser extent parts of Germany). So there’s a plan to save these financially distressed countries but opposition exists and will likely grow in the northern countries (Sweden, Denmark, Finland is already there)…the “core” countries are behind it not because they want to spare their countrymen nor because they are loyal to the EU…it’s because they don’t want a widespread bank failure on their hands.
4. So what’s the solution? Ultimately, there are only two ways out of the maze of debt and unsustainable social programs amassed in the EU; grow your way out…HAH! Or devalue the heck out of the euro by printing currency to monetize debt (similar to what the US is doing now with QE2). I guess at the extreme end there is a 3rd way, break up the EU or at least kick out the worst performers.
• The US equity market continues to be all about earnings…so far we’ve shrugged off concerns about the debt ceiling (or else the market has more or less become numbed to the political discourse in DC). Today 10.4% of the S&P 500 will announce earnings…so far the vast majority of companies have outperformed the analyst estimates for both earnings and sales…we’ll see if the trend continues. So far of the 14 companies reporting we’ve had 2 misses and one that was pretty much on the estimate and everyone else beat estimates…there have been at least three misses on the sales side.
• WTI is currently trading higher by 46 cents/bbl while the near term Brent contract is off 17 cents…the average retail price of gasoline across the US continues to hover around $4/gallon…it appears that we’re set for a repeat of the summer of ’08 in terms of gasoline prices.
Phillip Pennell, CFA
Turnberry Capital Management
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