The Start of Earnings Season

The Start of Earnings Season

April 13, 2011

“Why aren’t the honest bankers demanding prosecutions of their dishonest rivals?” –William Black, former regulator

Equity markets are up on better earnings by JP Morgan (up 67%) and the retail sales report, which came in under consensus at 0.4% vs. expectations of a 0.5% increase, but rose by 0.8% vs. 0.7% ex-autos. After a two day sell-off oil is up slightly this morning and commodities across the board, with the exception of copper and sugar, are finding a bid. The dollar is stronger this morning against the Yen, but weaker vs. the Yuan, which hit a 17-year high this morning. US Treasuries are weak this morning.

The IMF estimates that the US will have the largest budget deficit in the developed world at 11%. The shortfall is larger than that of both Japan and the UK. The report estimates that for the President to keep his promise of halving the deficit by the end of his first term he would have to implement the biggest budget cut in history over the next two years. Given the difficulty of achieving a miniscule cut last week, it seems unlikely.

Cisco announced a corporate restructuring and plans to eliminate its consumer group, including shutting down its recently acquired Flip Video division. Alcoa reported earnings Monday that overall disappointed investors. As we discussed the other day, revenue expectations were very high (28% for Alcoa), which may be a familiar story during Q1 earnings season.

Fed President Thomas Hoenig feels that Bank of America, Citigroup, and other major banks should be deemed government sponsored entities (GSEs), similar to Freddie Mac and Fannie Mae. This designation would allow the government to restrict their activities, which he proposes would include a ban on investment banking. “You’re a public utility, for crying out loud,” he said. BofA CEO Brian Moynihan responded by saying “I think customers want it together”, referring to retail and investment banking. Personally, I don’t think that when my mother deposits her social security check every month she breathes a sigh of relief knowing that BofA is engaged in investment banking.

The Economist characterized the US recovery as “tepid” and feels that cutting government spending is premature. “This is why it’s a problem to be obsessively cutting short-term government spending. And this is why it’s a problem when regional Fed presidents start recommending that the Fed end QE2 early.”

Japan upgraded their nuclear disaster to 7 on the international scale of 1-7. This is only the second time we’ve ever had a 7 (Chernobyl being the other). While Japanese government officials have maintained that this crisis is not as bad as Chernobyl, the reality is that it is just as bad, otherwise it wouldn’t have the high rating. As a side-note, Three Mile Island was rated a 5.

A copper shortage forecast for this year may be in doubt because of a buildup of stockpiles in China. Shanghai warehouses hold some 600,000 metric tons of refined metal, with another 100,000 tons in southern ports, which equals about 40% of China’s net refined copper demand. Some warehouses are running out of room to store metal, according to a report by Standard Bank .

The Washington Post is reporting that many of the $38 billion in spending cuts agreed upon by Republicans and Democrats are nothing more than accounting tricks that have no impact on spending. The budget compromise that headed off a U.S. government shutdown includes cutting $4.9 billion from the Justice Department Crime Victims Fund, which won't be spent this year anyway. For many programs, money cut could be restored by Congress next year with no impact on spending.

The Federal Reserve Bank of New York is circulating two lists of bonds acquired from American International Group as it prepares a second auction of the securities. The auction is similar to one held last week, when the Fed sold $1.3 billion in bonds. "It's probably going to look like this each week," said Jesse Litvak, a managing director and head of non-agency trading at Jefferies. "They probably feel like since the first list traded fine, they can continue with this level of bonds."

Higher gasoline prices are having an impact on demand as consumption is down 9% from last year, in spite of higher employment and a slightly stronger economy.

APAC markets rose last night as the weak yen helped the Nikkei.

Have a great day

Ned