Oct 12, 2011

Risk On, at Least for Today!

October 12, 2011

There is so much divergent information flow and volatility in the macro environment that someone should create a daily scorecard showing whether risk is on or off for that particular day. Today it’s on as volatility continues to decline, stocks rise, and bonds soften. The dollar is also weak. Even financial stocks are strong in spite of the pending Volcker rule we discussed the other day.

As I mentioned yesterday, Slovakia, the final EU member to vote on the plan to expand the Eurozone bailout fund, voted against the measure. Prime Minister Iveta Radicova said she is optimistic the bill can be passed by the end of the month. I wonder how the Slovakian populace, whose median earnings are roughly 50% of those found in Greece, feel about bailing out the Hellas?

Alcoa (AA) officially kicked off the earnings season last night and missed on higher production costs. The company posted EPS of $.14 vs. street expectations of $.22. Revenues were slightly above expectations at $6.4 billion. The stock is down 5% this morning. ASML, Cymer’s (CYMI) largest customer, reported slightly better than expected revenues and better earnings. Guidance for the 4th quarter was mixed, and the stock is up 8% this morning.

Chinese bank stocks surged yesterday after the Central Huijin Investment (a government owned subsidiary of the country’s sovereign wealth fund) began buying shares in the country’s four largest banks. I’m curious how positive it is when the government is effectively supporting the stock price of the country’s largest financial institutions? The Shanghai (see chart below courtesy Kimble Charting Solutions) has been the worst major market on the planet this year as concerns about a slowdown, or worse, abound.

Class warfare is alive and well, and promises to be a key theme in the 2012 election. one of the many areas addressed by Dodd-Frank, the financial services reform bill passed last year, was “excessive” executive compensation. Interestingly, the bill created a whole new bureaucracy that is exempt from government salary controls. The Office of Financial Research, a new bureau created by the act, can set pay “without regard to chapter 51 or sub-chapter III of chapter 53 of title 5, United States Code, relating to classification of positions and General Schedule pay rates.” In other words, salaries for this bureau aren't' subject to any limitations set out by our current laws, just the whims of their supervisors. I’m looking for the act that addresses “excessive” government salaries and benefits. Dodd Frank obviously isn’t that bill.

Not that this is a big surprise, but the President’s jobs bill failed to pass the Senate yesterday. It now appears that the bill will be broken up and some of the individual proposals may eventually be passed. The favorites appear to be extending unemployment benefits and cuts in payroll taxes. Outside of all the political posturing by both sides, the debate really boils down to permanent tax cuts and deregulation versus more federal spending and short term tax breaks.

I was gone last Friday, and never discussed the September Same Store Sales. Comps for the 25 stocks we follow were up an average of 3.6%. Fifteen of the companies beat comps, with ten missing, a deterioration from August and prior months. Outstanding double digit comps were posted by Zumiez, The Buckle, Costco, Limited, and Nordstrom. Weak comps were reported by Bon-Ton Stores, The Gap, JC Penney, and Walgreen.

The Senate wasn’t completely in a “say no” mood yesterday as they passed a bill to pressure China to let the yuan rise in value. The Chinese Foreign Ministry said the bill is protectionist and threatens to undermine the global economic recovery. Can anyone say Smoot Hartley three times, fast?

In a bit of good news, UBS has raised its 3rd and 4th quarter EPS estimates for the S&P 500.

The baseball playoffs were in full swing yesterday as the hobbled Tigers beat the Rangers and narrowed their series deficit to 2-1. The Brewers and the Cardinals play game three tonight, with the series tied at one each. And yes, the rumors are true, the Lions won on Monday night to move to 5-0. As my son said last night, “what in the world is going on in Detroit this year?”

Have a great day


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