What do Italy and Lehman Have in Common?

November 9, 2011

This morning I was trying to decide if Greece or Ireland was the European equivalent of Bear Stearns and if Italy becomes the Lehman Brothers of Europe. Yields on Italian debt have skyrocketed, rising faster than when Greek bonds began their collapse. The Prime Minister of Italy, Silvio Berlusconi, has promised to resign after turning down a low-interest rate loan from the IMF and saying “Italy does not feel the crisis. The restaurants are full.” After listening to that comment, I’m saying that Italy is closer to Lehman because of the similarities between Dick Fuld and Berlusconi.

The dollar and US treasuries are the beneficiaries of this latest flavor of catastrophe, European style, as investors flee Europe and run for safety. Meanwhile, things in Greece haven’t really improved, and concerns about Portugal are still viable. At some point the Germans may have to reevaluate their role as the banker to Europe and as a staunch defender of the Euro.

Fannie Mae (FNM) reported a $5.1 billion loss and is seeking $7.8 billion in aid from the US Treasury Department. They cited derivatives linked to CDOs and lower interest rates as the drivers of the losses. General Motors (GM) reported earnings this morning, and the stock is down 10% after guiding to a flat 4^th quarter and saying they don’t expect to reach breakeven in Europe. The stock is down by over 30% since its IPO. Macy’s (M) beat earnings and sales estimates for the quarter, but guided down for the 4^th quarter.

APAC stocks rose after China reported that consumer inflation had slowed to 5.5% in October, the smallest increase in three years. The government has been tightening lending standards, reserve ratios, and rates in an effort to slow down rampant inflation without letting the currency jump in value.

Gary Gensler, the Chairman of the CFTC, the group charged with supervising firms such as MF Global, has asked for more funding to help meet its expanding role. Mr. Gensler has been under extreme criticism lately for spending so much time rewriting rules related to Dodd-Frank and expanding the power base of the CFTC, yet during the same time period missed all the red flags of a company operating under his regulatory watch.

I hate to keep harping on this Keystone pipeline, but with the EPA issuing their final report that the project wouldn’t cause any environmental risks, domestic energy prices still extremely high, and unemployment at scary levels, it would seem this project would be a no-brainer. Now it appears the Administration is going to put off making a decision on it until after the election. “We have a President who is seriously considering tanking thousands of union jobs, in a 9% unemployment economy, and while on a jobs tour.”—Kimberly Strassel, referring to the Keystone XL pipeline project.

Earnings season is almost complete, with 419 of the companies in the S&P 500 reporting. Just over 300 companies, or 75%, have beaten EPS estimates so far, with only 238, or 56% beating sales estimates. Last quarter over 70% of companies beat sales estimates and 76% beat earnings. The decline in companies exceeding sales estimates reflects the obvious slowdown in demand.

Penn State football coach Joe Paterno, 84, has announced he will retire at the end of the season after 45 years as the coach of the Nittany Lions. Joe Pa holds the NCAA mark for most wins as a coach at 409.

Have a great day

Ned