Let’s recap some of what has happened in Europe just over the past six months with some banter that I hope summarizes and clarifies the situation. ·
Inflation is a problem, let’s raise rates. That was a good idea, let’s do it again. Wow, the economy is really slowing down. Houston, I think we have a problem, we can fix the Greek debt problem. We have a solution. No we don’t. We have a solution. No we don’t. We have a solution, we’ll give them money if they cut spending. Thanks for the offer, we appreciate it, but before we accept it, we’re taking it to the people. No we aren’t. Yes we are. No we aren’t. Yes we are. Hey, let’s cut rates.
I think that about does it for now.
Italy’s Mario Draghi, the new head of the ECB, announced a rate cut of 25bps this week, his first full week in office. So much for speculation he would continue the policies of Trichet.
Groupon (GRPN) will begin trading today in one of the most anticipated IPOs in a couple of years. The manipulation of this deal is what really makes it interesting. In an attempt to get an enormous pop in the stock and so that management can sell at higher valuations later, they are floating only 4.7% of the outstanding shares in the offering. There is a significant bear story as revenues per customer have declined from $5 to just over $1. The market cap (at $20 per share) of $12.7 billion is roughly 2x what Google (GOOG) offered for the company a year ago.
The ISM services index came in at 52.9 vs. estimates of 53.5, slightly better than the manufacturing index released earlier in the week. Initial jobless claims were in line at 397K. ICSC Chain Store sales missed estimates, coming in at 3.7% vs. estimates of 5.3%. Nonfarm payrolls today were below expectations at 80K (vs. the estimate of 95K0, as were private payrolls, up 104K vs. expectations of 125K. The upside came from the September revisions, which increased nonfarm payrolls from 103K to 158K.
PIMCO’s Mohamed El Erian outlined his market strategy today when he said investors should be “generally defensive, selectively offensive.” His point was to be primarily defensive due to the danger and uncertainty of the macro environment, yet keep an eye out for those rare opportunities which can transcend the macro uncertainty. It’s a difficult environment to say the least. JP Morgan reported that the average hedge fund is down 5.5% for the year and the average active manager is trailing his benchmark by 300bps.
On that point, correlations have never been higher outside of the fall of 2008. There are a multitude of factors contributing to this high correlation. Individual investors are almost non-existent in the market place. HFT’s are responsible for an enormous portion of the daily volume, yet they are virtually all day traders and need to have their books at zero by the end of the day. ETF volume is soaring, which means more index buying than stock buying. As an ETF moves through the day, they too must settle their book and therefore buy and sell every stock in their underlying benchmark based upon where their net position ends the day. Finally, the macro uncertainty has dominated the news flow, which creates moves in asset classes and sectors more so than in individual issues. Stock picking will again have its day, but the macro uncertainty needs to settle some.
Earnings continue, with Starbucks (SBUX) reporting a solid quarter and guidance yesterday. The energy sector has been reporting blow out numbers, yet the stocks are barely budging after their huge run in October. AIG is down hard this morning after a big miss last night.
A recent Morgan Stanley survey found that grocers had indicated 4-5% increases in food prices across most products. Consumers have been pulling back, driving negative volume across the industry. SuperValu (SVU) has announced plans to tighten the gap between its Every Day prices and its promotional prices. Kroger (KR) has been squeezing margins in certain markets with weaker economic conditions.
Remember that tomorrow is the 35th “Game of the Century” as #1 LSU battles #2 Alabama.
Have a great weekend