Risk Off-Summer Swoon Starting?

April 23, 2012

A funny thing happened on the way to austerity in Europe-the people revolted.  We haven’t seen an Arab Spring quite yet, but we are seeing a revolt at the polls.  French President Nicolas Sarkozy lost the first round of his re-election bid to the anti-Euro National Front party.   Dutch  Prime Minister Mark Rutte’s party lost the support of the opposition and majority Freedom Party as they revolted against spending cuts.  Credit spreads on Dutch bonds vs. German bunds rose to their highest level since 2009 and the country’s credit default swamps jumped 5%.  The dollar jumped 0.4% this morning and yields on the 10year are down to 1.92%. 

Equity markets are weak across the globe this morning after China announced another weak PMI report which suggests the country is in a contraction.  Commodities are correcting as well this morning, with copper falling 2.5% and oil falling as well.  The Hang Seng, one of the worst performing equity markets over the past 18 months, fell another 2.2% this morning. 

The Fed will be meeting this week, and while it isn’t expected that they’ll change course, it seems obvious that Chairman Bernanke is preparing us for another round of Fed action.  His language over the past few months suggests that in spite of inflation running ahead of their stated target, the Fed still hopes to keep their foot on the gas pedal to ensure the economy sustains the momentum from the fourth and first quarter. 

Wal-Mart (WMT) is under investigation for bribing government officials in Mexico.  While this is big news here in the US, and could lead to criminal charges, the practice is so wide-spread in Mexico that it didn’t even make news there.  It’s tough to make a ripple in the Mexican news when the people who take the bribes have their own name, Gester.  In addition to greasing the skids for companies wishing to do business in Mexico, the intermediaries also perform services such as paying your bills or delivering gifts.  Unfortunately for WMT, this could be a violation of the Foreign Corruption Act, which carries stiff penalties, with recent violators paying more than $1 billion in fines. 

Earnings are about 20% in the bag, and the numbers are actually coming in better than the prior two quarters versus consensus.  Of the 101 S&P 500 companies that have reported, 85% have beaten EPS while 74% have exceeded sales estimates.  Revenue growth for those 101 companies is averaging 4.6%.  Last quarter a mere 57% of companies beat their sales estimates, at an average growth rate of 7.1%, while 68% beat their EPS estimates.  The take away is that expectations have come down this quarter after a soft earnings season.   Apple (AAPL) will make a much anticipated report tomorrow.  Kellogg (K) announced weaker than expected earnings and is down this morning on the news. 

Nestle has agreed to pay just under $12 billion for Pfizer’s (PFE) infant nutrition  business, which obtains 85% of its sales from emerging markets. 

The IMF and US Treasury made an interesting request to an already tapped out ECB, asking them to do more to resolve the sovereign debt crisis.  ECB officials countered that they have done what they can, and Jens Weidmann, head of Germany’s Bundesbank, warned banks about becoming addicted to ECB funds.  “Monetary policy cannot solve structural problems.  Our shared monetary policy cannot lead to governments delaying reforms.” 

Another hole in the leaky Chinese boat has been labor costs, which have been rising over the past seven years.  While certain low-end manufacturing has already left the country for lower wage-cost regions, it appears that a flood of companies are looking to Vietnam.  The country’s stock index, the VN Index, recently hit an 11-month high as fund flows follow the manufacturing migration. 

The Federal Reserve, along with regulators, are giving US banks two years to comply with the Volcker rule.  Many of us are waiting for a repeal of Gramm-Leach-Bliley, which itself repealed Glass-Steagall. 

Something is happening to my Angels on their way to their inevitable World Series this season-they keep losing.  The team is now 6-10 after dropping a 3-2 game to the Orioles in extra-innings.  The team has struggled with its bullpen for the past few seasons after letting reliever Frankie Rodriquez go to free-agency, and while they may have both the best rotation and lineup in baseball, the bullpen has blown all its save opportunities this season.  Albert Pujols is still getting used to wearing his red uniform (I know, the Cardinals were red too, but I’m looking for a ray of sunshine here), and is waiting for Home Run #1. 

Have a great day

Ned