Aug 31, 2011

Exxon Deal with Rosneft

August 31, 2011

The week leading up to Labor Day is typically one of the lightest volume weeks of the year, and tends to finish in the black. September historically has been one of the two worst months of the year for stocks (April being the other). It will be interesting to see if these seasonal patterns hold true in 2011. This morning futures are up as investors continue to speculate that the Fed will attempt to stimulate the economy once again. The more dovish, majority members of the Fed have been more vocal in recent days than in the past, possibly laying the political groundwork for another round of quantitative easing.

The ADP Employment report came in this morning with an increase of 91K private sector jobs, lower than the expected increase of 100K and last month’s downwardly revised 109K. The Chicago Purchasing Manager’s index came in at a better than expected 56.5 for August vs. the estimate of 53.3 and July’s 58.8. Factory orders for July rose by 2.4% vs. expectations of 2.0%. Overall there has been a slight increase in the rate of positive economic surprises, although they are still negative, as shown by the Citigroup Economic Surprise Index below.

AT&T, facing scrutiny in their attempted takeover of T-Mobile, has promised to add 5000 call center jobs as a concession to getting regulatory approval for the deal. I find it highly unlikely that the merger will result in an overall net increase in jobs as early commentary discussed the operating synergies (i.e. duplicate positions) that could be achieved in the merger.

Exxon (XOM) inked a deal with Russia’s OAO Rosneft that will allow XOM to explore for oil in the Kara and Black seas. Rosneft will be able to purchase stakes in some of Exxon’s projects, the first Russian entity allowed to invest in an American energy asset.

APAC markets were mixed last night as China’s Shanghai fell by 0.7% while the Kospi rose 1.1%, Hang Seng 0.3%, and ASX 200 rose 0.2%. The Nikkei was flat.

Yes Virginia, there is a Santa Claus. We finally have some good news coming from Europe. I’m not talking about that “the bad news that’s viewed as good news” we’ve been receiving lately, such as another bailout. I’m talking legitimate, good old fashioned good news. GDP in Poland grew by 4.3% in the second quarter! That may prove to be the best GDP on the continent this quarter. Good news indeed.

In other European news, ECB President Trichet has indicated that the central bank is reconsidering its position on inflation, an indication the EU rate-increase cycle might end. Remember that they raised their key rate twice in the past several months, which contrasts with those bastions of economic growth and fiscal austerity Japan, the US, and England, all of which have maintained effectively zero rates.

I don’t think that anyone could disagree that consumer income and spending have been challenged over the past three years. The chart below, from Jim Bianco, shows the damage done to personal income during the most recent financial crisis, and how far incomes need to rebound just to get back to par.

India posted their slowest GDP growth in the past six quarters at 7.7%. Finance Minister Pranab Mukherjee said he was “disappointed” even though growth was much stronger than in the rest of the world.

One of my views on the impact of new capital regulations on banks has been that returns on equity will plummet. McKinsey just completed a report that confirms that view, estimating that returns on equity for the world’s top 13 banks will topple from 20% last year to roughly 7%. The report also anticipates a significant increase in regulatory costs, much of which will be passed on to consumers in the form of fees.

I don’t know about anyone else, but my kids go back to school this morning. They weren’t happy about it, but for me it was nice not being the first one in bed last night.

Speaking of back to school, retailers will begin discussing back to school results today and over the next week. I was out looking at stores Sunday, and while they were busy, it didn’t seem as though the register lines were uncomfortably long.

Have a great day


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