Europe’s Currency Crisis: A Look at Possible Scenarios (Michel)

Friday, June 8th, 2012

by Tatjana Michel, Director, Currency Analysis, Schwab Center for Financial Research

Key points

• A Greek exit from the eurozone has gone from “unthinkable” to a distinct possibility. Years of steep economic decline and unsustainable public debt have increased the odds that the country will once again default on its debt and possibly return to the drachma.
• A Greek default/exit would present risks to the European banking system, could cause a severe downturn in the Greek economy and might trigger contagion that spreads to countries like Spain, Ireland and Portugal.
• The European Central Bank and other institutions theoretically have tools to lower contagion risk, but may lack the time and political will to use them.
• Ultimately, the exit of one country from the euro could lead to the exits of other countries and a breakup of the euro as it’s currently known.
• We suggest investors limit exposure to European bond markets and the euro, both of which are likely to experience more downside.

The May 6 elections in Greece ousted the party that had negotiated and agreed to the bailout package offered by the European Central Bank (ECB), International Monetary Fund (IMF) and European Commission (EC). This group, often referred to as the “troika,” provided bailout funding to the Greek government so that it could cover its debt payments in exchange for a promise that the country would bring its budget deficit and debt down by reducing spending and raising taxes. Greek voters have effectively rejected the agreement because of the negative impact that spending cuts have on their economy, which is already in deep recession. No party won a majority in parliament in the May elections and a coalition could not be formed. Therefore, new elections are scheduled on June 17.

If the new government insists on renegotiating the terms of the current bailout plan, new talks with the troika will have to take place shortly after the election. If there is no agreement, the troika could decide to deny Greece its next chunk of bail-out money, which would likely lead to a default on Greece’s sovereign bonds.

Greece needs to form a new government and reach an agreement with the troika before it runs out of money in July 2012. If they reach an agreement, Greece is likely to stay in the eurozone but would need to stick to the new austerity plan to continue receiving aid.

Greek opinion polls show elections are wide open

According to recent poll results, the June 17 elections are wide open and could very well lead to a government that meets Europe’s terms for keeping Greece in the euro. However, it could also put in power a coalition government that’s firmly against austerity—positioning Greece for an exit from the euro.

Scenario 1: Coalition around New Democracy keeps Greece in

Although traditionally powerful Greek political parties like the Pan-Hellenic Socialist Movement (PASOK) and New Democracy (ND) have seen their influence wane in recent years, ND has been catching up with the anti-austerity Coalition of the Radical Left (SYRIZA) party since May 6. Should ND be able to get the upper hand in the June 17 elections, it would increase the likelihood of an agreement with the troika.

Source: Greek Ministry of Interior
*PASOK (Pan-Hellenic Socialist Movement), ND (New Democracy), DISY (Democratic Alliance), KKE (Communist Party of Greece), LAOS (Popular Orthodox Rally), SYRIZA (Coalition of the Radical Left), DIMAR (Democratic Left), ANEL (Independent Greeks), XA (Popular Union). ** Projected estimate of vote tally, after disregarding all blank votes and absentees, and after adjusting for the “likely votes” of “undecided voters.

Scenario 2: Coalition around SYRIZA precipitates Greece’s exit

SYRIZA, on the other hand, has denounced the current austerity plan. Party leader Alexis Tsipras believes Greece can stay in the euro and continue receiving money while cutting austerity measures—something Germany and other creditors probably aren’t going to like. If SYRIZA gains control, it would likely make the negotiations with the troika difficult and increase the risk of a Greek default and exit.

Tags: Bailout Package, Bailout Plan, Budget Deficit, Contagion, Currency Analysis, Currency Crisis, Debt Payments, Distinct Possibility, Drachma, Economic Decline, Elections In Greece, ETF, ETFs, European Banking System, European Bond Markets, Eurozone, Greek Economy, Greek Government, International Monetary Fund, International Monetary Fund Imf, Public Debt, Troika
Posted in Markets | Comments Off

Investors Flee to Safety on Jobs Disappointment and Eurozone Concerns

Tuesday, June 5th, 2012

by Douglas Coté, ING Investment Management

- Disappointing U.S. economic data combined with continued concern about the fate of Europe to send investors fleeing to safety. Global equity markets fell to finish off a brutal May, while benchmark tenyear U.S. Treasuries hit a new all-time low of 1.46%. The German two-year bond yield fell below 0%, meaning investors preferred a guaranteed loss to the uncertainties of holding other securities.

- First quarter economic growth was restated down to 1.9% from the previous estimate of 2.2%, as inventory building and government spending were markedly weaker than expected. Corporate profits, however, posted their largest quarterly gain since fourth quarter 2009.

- Jobs data were disappointing. Nonfarm payrolls came in at 69,000 for May, far short of the 155,000 economists had expected. Separately, ADP reported the addition of only 133,000 private sector jobs; the consensus estimate had been 150,000. New unemployment claims increased for the fourth consecutive week, while the unemployment rate rose from 8.1% in April to 8.2% in May. Median unemployment duration rose to over 20 weeks, with 43% of the unemployed out of work more than six months.

- Pending home sales in the United States unexpectedly fell to a four-month low, tempering some of the recent positive data in the housing market. Meanwhile, the Case-Shiller home-price index ended March at its lowest level since the housing crisis began.

- Though investors took comfort in a survey suggesting that Greece may be able to form a government following its June 17 elections and abide by its bailout plan, the situation in Spain grew more precarious, sending yields on Spanish debt close to euroera highs. Bankia, the country’s third-largest bank, has asked for government assistance to the tune of €19 billion, and a number of other banks are also thought to need recapitalization.

- The Indian economy grew at its slowest pace in almost ten years during the first quarter. GDP growth of 5.3% fell short of the consensus estimate of 6.1% as both the manufacturing and agricultural sectors foundered.

Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future results.

Copyright © ING Investment Management

Tags: agricultural, Bailout Plan, Bond Yield, Case Shiller Home Price Index, Consensus Estimate, Corporate Profits, Economic Data, Eurozone, Fourth Quarter, Global Equity Markets, Government Assistance, government spending, Home Price Index, Housing Market, India, Indian Economy, Ing Investment Management, Nonfarm Payrolls, Recapitalization, Treasuries, Unemployment Duration, Unemployment Rate
Posted in Markets | Comments Off

Chuck Royce: Why the Rally Can Last

Tuesday, April 3rd, 2012

by Chuck Royce, Royce Funds

Can the current rally last through the end of the year?

I think it can. What’s interesting to me is that we’re seeing one of those rare occasions when one of our predictions for the market as a whole worked out almost exactly the way we thought it would. For a while now, we have been noting the disjunct between the very negative and alarmist headlines and the more optimistic view our own analyses and contacts with managements were revealing. It seemed to us as early as last September that the economy was in better shape than the conventional wisdom was suggesting.

“I think we’re on our way to a positive and satisfactory year.
I also believe that we’re on our way to seeing three- and five-year
average annual total returns that will look better than what
most investors have seen recently.”

There were—and are—problems that need to be worked out, but we were hopeful that eventually the world’s bankers and politicians would formulate solutions, at least for the most immediately pressing issues, such as Greek default. The announcement of a bailout plan for Greece created a great sense of relief throughout the capital markets. Once it became clear that Europe would not go bust, investors felt better about the growing stability in the world economy. This positive development, along with the improving economy and the underperformance of the stock market over the last five years, leads me to think that the rally can last. The year’s remaining quarters may not be as robust as 2012′s first three months, but I remain cautiously optimistic and still think that this decade will be better for stocks than the previous one.

So you’re still a strong believer in equities?

Absolutely. I think we’re on our way to a positive and satisfactory year. I also believe that we’re on our way to seeing three- and five-year average annual total returns that will look better than what most investors have seen recently. To me, it all comes down to equities remaining the most effective choice for assets that carry risk. I agree strongly with the notion that a carefully constructed stock portfolio is the best way to build long-term returns that can outpace inflation and preserve purchasing power.

Returns for the major U.S. indexes—and many around the globe—were closely correlated in the first quarter. When do you expect this to change?

It’s certainly more pleasant to participate in a correlated rally than it was last year to be part of a widespread bear market. I expect correlation to remain fairly high through the intermediate term, though I don’t see that refuting the argument that we still need to shop the market for what we think are the highest quality small-cap companies trading at attractive valuations. So as much as correlation has been a fact of life for most of the current market cycle, we continue to invest with an eye toward non-correlated equity results, particularly when looking at companies outside the U.S. We build our portfolios anticipating that they will outperform and, more importantly, provide strong absolute returns over the long term. At some point, we expect correlation to abate and more differentiated returns to materialize.

Do you still see quality stocks, regardless of market cap, as potential market cycle leaders?

We do. Quality as we define it—companies with strong balance sheets, positive cash flow, and high returns on invested capital—has done well on an absolute basis both in the current rally and since the small-cap high in July 2007. However, during the rally off the October 3, 2011 small-cap low, quality small-cap stocks have lagged. This hasn’t been altogether surprising since most rallies, especially those in the aftermath of the financial crisis, have not favored quality. However, our thought is that quality will likely begin to lead when we start to see more differentiated returns. When those investors who have been avoiding stocks return to the market, we suspect that many will be looking for those attributes that we typically seek.

Should there be room in asset allocation plans for global or international small-caps?

We think that any diversified asset allocation plan should include some global or international stocks. The reality is that we are in an increasingly global economy. Equity portfolios that hold mostly or exclusively domestic companies are invested in stocks that derive a substantial amount of revenue from outside the U.S. More important from our perspective is the vast size and return potential of the universe. We see it as too important an area to ignore.

What do you see as Royce’s strengths culturally?

We also believe strongly in eating our own cooking. Each of our portfolio managers is a large shareholder in the funds that he or she manages, which is an absolute necessity. I don’t think you can manage effectively without some skin in the game.

First, company culture is an important and necessary topic. It’s especially important for financial services firms in light of the op-ed piece that Greg Smith wrote recently in The New York Times. We have always cherished certain values here at Royce, and those values inform everything that we do. For example, our long-term orientation doesn’t simply apply to our portfolios, it also applies to the holding periods we have for stocks, the tenure of portfolio managers on our funds, the length of time we want all of our employees to be with the company, and even the objectives and tenures of the management teams that we meet with. We look for companies capable of establishing long-term goals for their businesses because we typically plan on holding companies for at least a few years. There are several that we have owned for more than a decade.

We also believe strongly in eating our own cooking. Each of our portfolio managers is a large shareholder in the funds that he or she manages, which is an absolute necessity. I don’t think you can manage effectively without some skin in the game. Our employees who are not part of the investment staff are also shareholders, so it’s a company-wide practice that we encourage. Somewhat related to this is the fact that many managers serve on multiple portfolios, which had fostered a highly collaborative culture. There are no rewards for having the best idea and no penalties for coming up with ones that don’t work. We evaluate our people with the same long-term standard that we use for portfolios, so each manager will have his or her share of hits and misses. Making mistakes is part of learning how to be successful, so we allow for that and are never shy about admitting when we’ve screwed up. We can’t expect shareholders to make a long-term commitment to us without being transparent about our process and practices.

Finally, I think that discipline and consistency are vital parts of our culture. Maintaining our discipline has been crucial to building long-term returns, whether we’re talking about the ’87 crash, the early ‘90s recession, the Internet Bubble or the 2008 crisis. Through all of those points and more, we stuck to what we think we do best. It wasn’t always easy, but our sense through each trying time was that eventually we and our shareholders would be rewarded for our patience.

Important Disclosure Information

The thoughts expressed in this piece are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of micro-cap, small-cap and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Securities of non-U.S. companies may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic or other developments that are unique to a particular country or region. (Please see “Investing in Foreign Securities” in the prospectus.) Therefore, the prices of securities of foreign companies, in particular countries or regions may, at times, move in a different direction than those of securities of U.S. companies. (Please see “Primary Risk of Fund Investors” in the prospectus.)

Copyright © Royce Funds

Tags: Bailout Plan, Believer, Bust, Capital Markets, Conventional Wisdom, Decade, Disjunct, First Three Months, Gold, Greece, Last September, Optimistic View, Politicians, Quarters, Rally, Royce Funds, Shape, Stock Market, Stocks, Those Rare Occasions, World Economy
Posted in Brazil, Markets | Comments Off

Winning the War in Europe (Minerd)

Wednesday, March 7th, 2012

Winning the War in Europe

March 2012

by Scott Minerd, CIO, Guggenheim Partners LLC

In centuries past, there have been many wars fought to bring Europe under one economic and political union. Today, in many ways, Europe is engaged in another war – a war to preserve the hard-fought gains of monetary and fiscal union built over the past five decades. Just as past European conflicts resulted in grave economic costs and massive amounts of debt, this fight has taken a similar path. How long will it take to resolve? The interwar period from 1918 to 1939 may offer some insight.

In centuries past, there have been many wars fought to bring Europe under one economic and political union. The Napoleonic Empire, the Prussian Empire, the Third Reich, and even the Ottoman Empire further to the east ultimately failed to achieve this goal. Today, in many ways, Europe is engaged in another war – a war to preserve the hard-fought gains of monetary and fiscal union built over the past five decades beginning with the Treaty of Rome in 1957.

The battles of this conflict, like previous European wars, are being fought across a broad theater. The Argonne, Waterloo and Normandy are among the many famous battlefields of the past. Greece, Portugal and Ireland are among the theaters of war in which European Union is currently engaged.

Just as past European conflicts resulted in grave economic costs and massive amounts of debt, this fight has taken a similar path. In the latest incursion, Greece has obtained a temporary cease fire in the form of a new €130 billion bailout plan, once again dodging an immediate threat of default and destabilization. Yet this plan will only reduce Greece’s debt to approximately 120% of the nation’s gross domestic product. Waiting in the wings are Portugal and Ireland, Italy and Spain – and later down the road, Belgium, and who knows what other European states – which may soon require their own restructurings.

Highly indebted nations as a result of war are common in the European experience. In fact, today’s experience doesn’t look all that different from another period in history when European nations were saddled with huge debts, had little means to repay them, and stumbled through a series of bailout plans that ultimately failed to solve the fundamental problems.

The Interbellum
As the clouds of conflict lifted in 1918 and the Great War came to an end, the victorious Allies embarked on a plan – several plans, actually – to force Germany to pay for the incalculable destruction throughout Europe. The initial bill for war reparations was set at 269 billion gold marks, an amount that dwarfed the size of the German economy, amounting to approximately 300% of GDP.

Other European nations had borrowed heavily to fight the Great War. Many ended the war with astronomical amounts of debt, including Great Britain (154% of GDP), France (258% of GDP) and Italy (153% of GDP). Then, as now, there were strict demands for austerity measures, flat refusals to accept losses on certain debts, and constant infighting over bailout plan after bailout plan. Deadlines were missed; new plans proposed; the populous rose up in arms; and the whole process started over again. This serial restructuring saga continued throughout Europe for the entire interwar period.

Without the realistic ability to pay its enormous war debt, Germany spent the next 14 years on a path of multiple restructurings, occasionally paying installments (often in coal and timber) but more often defaulting on its financial obligations. Other European countries, particularly war-ravaged France, demanded full payment from the fledgling Weimar Republic. Initially, with its economy decimated by war and austerity measures, Germany responded by printing more and more money. In a startling surprise, the world was aghast as it watched Germany slip into hyperinflation where, at its height, one U.S. dollar was worth 4 trillion German marks.

Drawing parallels with Weimar may seem ironic – as Germany is now the strongest economy in Europe and the leading advocate for austerity measures in Greece – but if one digs deep enough into the Interbellum, there are many similarities today. Germany wasn’t the only debtor-in-crisis back then, just as Greece is not today, but it was the poster child for Europe’s post-war economic angst.

The Dawes Plan
The first indication that things were not going well came early on. During the 1919 Paris Peace Conference, British economist John Maynard Keynes resigned as the principal representative of the British Treasury and stormed out of the conference to protest the high reparations demanded of Germany. Keynes, one of the fathers of modern economics, warned that punitive reparations would cripple the German economy and could lead to future conflict. It didn’t take long for the rest of Europe to realize that Germany had neither the ability nor willingness to pay the full amount.

In August 1924, the Allied powers approved the first major restructuring package, known as the Dawes Plan. It was named for its principal architect, Charles G. Dawes – an American financier and later U.S. Vice President during Calvin Coolidge’s second administration. Without addressing the dollar amount owed, the Dawes Plan outlined a series of financial reforms for Germany, including currency stabilization, new taxes, and massive new loans primarily through American banks to help stimulate economic growth and pay off debts. Hailed an as an international hero in 1925, Dawes won the Nobel Peace Prize for his work.

The Young Plan
Within four years, however, it became clear that more needed to be done. In 1929, American businessman Owen D. Young (co-author of the Dawes Plan) led another restructuring effort. The Young Plan called for a more than 50% reduction in Germany’s reparations debt, extended the payments over a 58-year period, and imposed additional taxes. For his bold debt reduction plan, Young was named Time Magazine’s “Man of the Year.”

Tags: Bailout Plan, Cease Fire, Economic Costs, Europe March, Gross Domestic Product, Guggenheim Partners, Incursion, Indebted Nations, Interwar Period, Ireland Italy, Massive Amounts, Napoleonic Empire, Ottoman Empire, Prussian Empire, Restructurings, S Gross, Third Reich, Treaty Of Rome, Waiting In The Wings, War In Europe, Winning The War
Posted in Markets | Comments Off

“Ich bin ein Berliner” (Saut)

Tuesday, November 8th, 2011

“Ich bin ein Berliner”
November 07, 2011

by Jeffrey Saut, Chief Investment Strategist, Raymond James

“Ich bin ein Berliner” was a German phrase used by President John F. Kennedy in his famous Berlin speech where he was emphasizing the U.S. support for West Germany after the Soviet-supported East Germany erected the Berlin Wall as a barrier to prevent movement between East and West Berlin. Last week at the G20, like John Kennedy, President Barack Obama tried to emphasize America’s support for a German bailout plan to prevent a Greek tragedy. The tragedy’s trajectory rose sharply on Tuesday when Greek Prime Minister George Papandreou announced there would be a referendum to decide if the new austerity measures for a second bailout (the first was on July 21, 2011) would be acceptable to the Greek people. That news shocked the world’s equity markets, which was reflected by the Dow’s Dive of some 297 points. I was seeing portfolio managers at the time and told them that in my opinion Papandreou’s prose was telegraphing a Greek withdrawal from the EU. A withdrawal because the Prime Minister knew the Greek people would never vote for such measures and because the vote most likely would not be held until next year. Further, Papandreou knew that given the uncertainty of an austerity vote the IMF would probably hold back its already scheduled disbursement of funds. To be sure, the IMF’s funding conditions require a clear horizon for 12 months, so Greece’s €8-billion tranche, which would come from the IMF, probably would have never showed up.

A Greek withdrawal from the Euro-zone would also be quite messy. Firstly, leaving the euro and returning to the drachma should cause a sharp devaluation in the drachma’s value vis-à-vis other currencies. A good example of this is the monetary breakup of the Austro-Hungarian Monetary Union in 1919. Secondly, the switching of currencies requires changing domestic laws to allow wages and incomes to be paid in the new currency. As well, domestic debt has to be recalibrated for the new currency. Thirdly, Greece’s government would be unable to borrow from the financial markets and thus forced to cut its budget deficit to zero. As The Wall Street Journal notes:

“[Greece’s] debt burden – the weight of government debt as a proportion of economic output – would soar. The economy would shrink as the new national currency depreciated against the euro, but most of the government bonds would still be euro-denominated. If that weren’t enough, many economists argue that the economic benefits of a sharp currency depreciation could quickly be dissipated by wage inflation.”

Then there are things like preparing for capital flight, bank holidays to slow withdrawals, reprogramming cash registers/vending machines/etc., making new notes and coins, well you get the idea. Indeed, it’s all Greek to me … pass the ouzo!

Comes Thursday, however, Papandreou drops his controversial referendum proposal as he faced a “no confidence” vote on Friday. Interestingly, he survived that vote, but surprisingly the DJIA (11983.24) didn’t follow on to Thursday’s Triumph (+208.43). And that, dear reader, raises the question – is the stock market merely reacting to the on/off news from Greece and the EU? – or, has the October rally been more about the better than expected economic news in the U.S.? Our sense is the rally from the “undercut low” of October 4, 2011 has been driven by better than estimated economic reports. Verily, the economy has been doing better than most expected. For example, the recent real GDP report showed an uptick to 2.5%. But, the real GDP, less the change in private inventories, increased by 3.6% (seasonally adjusted annual rate) during 3Q11 versus +1.6% in 2Q11. This suggests companies chose to meet the stronger demand by selling inventories rather than increasing output. This only reinforces our belief that corporate America will have to build inventories, which should add ~1% to this quarter’s GDP report. Then there was the strength in producers’ durable equipment, which jumped 17.4% during 3Q11. Hereto, this plays to our argument that spending on capital equipment (capex) should torque up into year-end, spurred by the ability to expense capex. The fear here is that the 100% expensing feature is slated to expire on December 31, 2011 unless it is extended.

As stated in last Monday’s missive, about three-quarters of October’s economic releases have been coming in better than expected. Unfortunately, that skein was broken last week with seven of the 18 economic releases better than estimates, eight weaker, and three in line. And maybe that, rather than Greece, was the reason for the early week two-day train wreck of down 573.15 points for the senior index. The downside two-step registered back-to-back 90% Downside Days whereby both the declining volume, and the number of downside points, equal or exceed 90% of the total volume and total points traded. Typically, such back-to-back Downside Days tend to temporarily exhaust the sellers, which was the case last week as Wednesday and Thursday’s sessions recorded back-to-back 80% Upside Days. For the past few weeks we have been suggesting some kind of pause/pullback was due, commenting that the McClellan Oscillator was about as overbought as it ever gets. Ditto the percentage of stocks in the S&P 500 (SPX/1253.23) that were above their respective 50-day moving averages (only 4% in early October versus 93.6% as of last Monday morning); and the fact that according to our “day count” sequence, with October 27th being session 17 in the typical 17 – 25 Buying Stampede, the straight up rally was long of tooth.

As for earnings season, earnings continue to track above expectations as with 432 companies in the S&P 500 reporting, earnings are better by 22.2%, with a 12.2% increase in revenues, year over year. The question then arises, “Why are fundamental analysts lowering their forward estimates?” Indeed, there have been noticeable declines in estimates for eight of the S&P’s ten macro sectors. The two sectors where estimates have not been lowered are Healthcare and Utilities. Nevertheless, it has indeed been a great earnings season and we expect more of the same into the Christmas selling season. To that point, there is a high correlation between strength in the stock market and a good Christmas “sell through.” Accordingly, we expect a decent Christmas and suggest investors consider select retailers as investments. As the keen-sighted folks at the Bespoke Investment Group opine:

“In order provide a more detailed look at the performance of retail related groups’ pre and post Thanksgiving, in the table we show the annual returns of the S&P 500, the S&P 500 Retailing group, as well as the various subgroups in the Retail sector from the start of November through Thanksgiving. From 2000 through 2010, the S&P 500 has averaged a gain of 0.9% from 11/1 through Thanksgiving with positive returns nearly three quarters of the time. Retailers, on the other hand, have done even better. From 2000 through 2010, the S&P 500 Retailing group has seen an average gain of 1.6% with positive returns nearly two-thirds of the time. Looking at individual sub-groups shows that Internet retailers (beginning in 2002) have seen the best returns in November with an average gain of 4.8%. After online sales, the next best groups are Apparel (3.1%) and Restaurants (2.8%). If you are looking to generate alpha, both of these groups have outperformed the S&P 500 73% of the time since 2000.”

Some Strong Buy-rated names for Raymond James’ universe of stocks playing to this theme are: Bed Bath & Beyond (BBBY/$62.03); Big Lots (BIG/$41.32); Family Dollar Stores (FDO/$58.97); O’Reilly Automotive (ORLY/$76.90); Red Robin Gourmet Burgers (RRGB/$26.57); Select Comfort (SCSS/$20.77); and Wal-Mart Stores (WMT/$57.50).

The call for this week: Last Monday I wrote, “To us, the real question is – will the SPX get a pullback to the often mentioned pivot point of 1217, or will any pullback be short and shallow? Well, by our work the equity markets still have a lot of internal energy to power their way higher, so our sense is the SPX will keep pushing higher in the months ahead with only shallow pullbacks and sideways pauses along the way.” While falling from 1284.59 to 1218.28 the first two days of last week hardly qualifies as “shallow,” I do find it interesting that on the numerological date of 11/1/11 the S&P 500 closed near the aforementioned pivot point of 1217 and then rallied. Accordingly, we would view a decisive close below that 1217 pivot point as a negative, suggesting a decline back into the 1100s. A more likely outcome, however, is for the SPX to spend some time consolidating before resuming its advance.

P.S. – I am actually here all week …

Click here to enlarge

Copyright © Raymond James

Tags: Austerity Measures, Bailout Plan, Barack Obama, Berlin Speech, Berlin Wall, Bin Ein Berliner, Bonds, Chief Investment Strategist, Clear Horizon, Drachma, Euro Zone, George Papandreou, German Phrase, Greek Prime Minister, Greek Tragedy, Ich Bin Ein Berliner, jeffrey saut, Monetary Union, Portfolio Managers, President John F Kennedy, West Berlin
Posted in Bonds, Brazil, Markets | Comments Off

Jim Rogers: Greek Bailout May be Prelude to EU zone Collapse, plus News and Views

Friday, November 4th, 2011

via PivotFarm

Nov. 4 – Jim Rogers tells Reuters the Greek bailout plan merely pushes the debt crisis into the future, and could cause spark an end to the euro zone in five years.

News and Views

U.S. employment climbed in October at the slowest pace in four months, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben S. Bernanke this week.

The 80,000 increase in payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington. The unemployment rate fell to a six-month low of 9 percent from 9.1 percent even as the labor force expanded. http://www.bloomberg.com/news/2011-11-04/u-s-payrolls-increased-by-80-000-in-october-as-jobless-rate-falls-to-9-.html

World leaders expressed impatience and irritation with Europe’s inability to defeat its two-year financial crisis as they urged swift resolution for the sake of the global economy.

With Greece’s debt-ridden government at risk of collapsing as soon as today, Group of 20 chiefs meeting in Cannes, France, yesterday pushed European authorities to flesh out and enact a week-old rescue plan that has already shown signs of unraveling.

“We are grappling with a lack of confidence in markets that leaders will act,” Australian Prime Minister Julia Gillard said in the French seaside resort. “It is therefore very important for leaders to act.”

Such calls — echoed by the U.S., Britain, China and Russia — highlight international disappointment that Europe missed the G-20’s deadline of this week to deliver a fix for its fiscal woes. German Chancellor Angela Merkel and French President Nicolas Sarkozy sought to regain the initiative by keeping aid for Greece on ice and demanding Italy accelerate austerity. http://www.bloomberg.com/news/2011-11-03/g-20-leaders-urge-europe-to-quell-debt-crisis-as-greece-government-teeters.html

Greece has dropped its plans to hold a controversial referendum on the country’s euro zone membership, which had threatened to plunge the bloc into a crisis, the country’s finance ministry said on Friday.

Finance Minister Evangelos Venizelos made the pledge in telephone calls made to Eurogroup Chairman Jean-Claude Juncker, European Commission’s Economy and Monetary Affairs chief Olli Rehn and German Finance Minister Wolfgang Schaeuble, the Greek finance ministry said in a statement.

“Venizelos informed his interlocutors about the decision to not hold a referendum,” the statement said. http://www.reuters.com/article/2011/11/04/us-greece-referendum-idUSTRE79U5PQ20111104

Indexes

European stocks pared their gains after Germany’s September manufacturing orders unexpectedly fell, sparking concern that the region’s economic growth is faltering.

The Stoxx Europe 600 Index rose 0.2 percent to 242.61 at 11:14 a.m. in London, after earlier rising as much as 0.6 percent on Greece’s cancellation of a referendum on euro-area’s bailout package. The gauge has retreated 2.6 percent so far this week as the referendum call stunned investors. The MSCI Asia Pacific Index jumped 2.5 percent. Standard & Poor’s 500 Index futures dropped 0.2 percent before a U.S. jobs report.

German factory orders unexpectedly plunged in September as demand from the euro region slumped, adding to signs the region’s debt crisis is damping growth in Europe’s largest economy. http://www.bloomberg.com/news/2011-11-04/stock-index-futures-in-europe-advance-hermes-commerzbank-may-be-active.html

Asian stocks rose for the first time in five days as Greece scrapped a plan to hold a referendum on a bailout package and the European Central Bank cut interest rates, reducing concern the debt crisis will spur a credit crunch.

HSBC Holdings Plc (HSBA), Europe’s No.1 lender by market value, climbed 3.2 percent in Hong Kong. Komatsu Ltd. (6301), Asia’s largest maker of construction equipment by market value, surged 6.9 percent after a report showed orders at American factories increased in September. China Petroleum & Chemical Corp, China’s biggest oil refining company by sales, led the nation’s energy companies higher on speculation the government may allow the mainland’s fuel producers to adjust prices on their own.http://www.bloomberg.com/news/2011-11-04/asian-stocks-climb-for-first-time-in-five-days-on-europe-rate-cut-greece.html

Currencies

Japan’s slide back toward deflation means bond investors are getting some of the highest returns among developed nations even with the world’s lowest yields.

Annual inflation slowed to zero in September, meaning investors in the nation’s benchmark 10-year securities receive the full 0.99 percent yield. That’s the highest so-called real yield for any Group of Seven nation except Italy’s 2.79 percent.

The Bank of Japan cut its inflation forecast last week and said it would buy more government bonds to underpin an economic recovery being threatened by the yen’s surge to a postwar record. The government intervened on Oct. 31 to weaken the currency for the third time this year. With the Federal Reserve discussing more steps to spur its economy and Treasuries yielding less than U.S. inflation, Japan’s efforts may not curb the yen’s strength. http://www.bloomberg.com/news/2011-11-03/deflation-driving-up-real-yield-hampers-effort-to-weaken-yen-japan-credit.html

Canada’s dollar dropped for the first time in three days after a government report showed the jobless rate unexpectedly increased in October as the nation’s employers eliminated positions.

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, extended its weekly decline on increased speculation that the Bank of Canada will lower borrowing costs.

“It’s a miss in a very meaningful way,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, in a telephone interview. “This is likely to contribute to some Canada lagging.” http://www.bloomberg.com/news/2011-11-04/canadian-dollar-drops-as-employers-unexpectedly-eliminated-jobs-in-october.html

Commodities

Wheat is heading for the biggest slump in three years as the second-largest harvest on record swells stockpiles, easing shortages that drove global food costs to an all-time high.

Prices that plunged 20 percent to $6.375 a bushel this year in Chicago will probably drop as low as $5.90 before the end of December, according to the median estimate of nine analysts and traders surveyed by Bloomberg. Supply in the 12 months ending June 30 will expand 5 percent to 684 million metric tons, boosting inventories to the highest in a decade, the London- based International Grains Council estimates.

Production is expanding after last year’s 47 percent price rise led farmers to plant more grain, while Russia and Ukraine recovered from drought that ruined crops. Cheaper wheat will reduce strains caused by rising corn and rice prices and add to pressure on United Nations-monitored food costs that have declined 9 percent from a record in February. http://www.bloomberg.com/news/2011-11-03/wheat-plunging-as-decade-high-stockpiles-ease-world-shortages-commodities.html

Gold prices in euros will rise to a record as Europe’s sovereign-debt crisis erodes the appeal of the 17-nation currency and boosts demand for the precious metal as an alternative asset, according to economist Dennis Gartman.

Gold has had an inverse relationship to the euro during the past week, as the metal jumped 3.8 percent and the currency slid 2.6 percent. The euro, which has declined in three of the last four months, may fall below $1.30 from about $1.38 yesterday, Gartman said.

“The driving force in the gold market is the problems in the euro,” Gartman said in a telephone interview from Suffolk, Virginia, where he publishes his Gartman Letter. “Central banks in Europe and individuals will want to lower their euro holdings and buy gold since no one knows what is happening to the euro. The euro is heading towards parity once again.” http://www.bloomberg.com/news/2011-11-03/gartman-sees-gold-in-euros-at-record-as-currency-slides-chart-of-the-day.html

Tags: Angela Merkel, Australian Prime Minister, Bailout Plan, Bonds, Canadian, Canadian Market, Cannes France, Chancellor Angela Merkel, Commodities, Debt Crisis, European Authorities, Federal Reserve Chairman, Fiscal Woes, French President Nicolas, French President Nicolas Sarkozy, French Seaside Resort, German Chancellor Angela Merkel, Gold, Greece Government, Jim Rogers, Julia Gillard, Lack Of Confidence, Nicolas Sarkozy, President Nicolas Sarkozy, Swift Resolution
Posted in Bonds, Brazil, Canadian Market, Commodities, Gold, Markets | Comments Off

Problems in Europe Overshadow Good Earnings Season

Monday, May 17th, 2010

This article is a guest contribution from Phil Kwon, Vice-President, Investment Management and Research, Richardson GMP Ltd.

The week started with a bang when the European Union announced details of a $1-trillion loan plan to support the economies of Portugal, Italy, Greece and Spain (PIGS). News of the support plan sent equity, commodity, and currency markets significantly higher in the early going on Monday morning. The magnitude of the bailout plan, which includes third party debt purchases by the European Central Bank, shows just how serious this problem could have become. The announcement of the bailout plan was introduced to help buy time for the PIGS to help get their finances in order and also to deter the depreciation on the Euro. However, this euphoria did not last long and doubts over Europe’s ability to weather their debt problems became forefront by the end of the week.

Deutsche Bank Chief Executive Josef Ackermann told German television Thursday evening that there are some doubts about Greece’s ability to repay debt and German Chancellor, Angela Merkel, said Friday that Europe is in a “very, very serious situation” and that successfully negotiating the sovereign debt problem isn’t a sure thing. This sounds much gloomier than earlier in the week when she said the loan package to which European leaders agreed on Sunday “serves to guarantee and secure the future of the Euro.” With such dramatic headlines, markets saw the Euro plunge on Friday and close at a four year low. The currency is down almost 20% from its 12 month high reached at the end of the 2009. North American markets which had taken the bailout package in stride, and were climbing higher for the majority of the week fell dramatically on Friday. However, even with a sour ending, the S&P/TSX held on to a weekly gain of 2.8% and the S&P500 was also up 2.2%. As mentioned in last week’s commentary, volatility which had dramatically spiked has subsided and was down 24% for the week. The jumped witness two weeks ago was the largest weekly jump on record.

Commodities took it on the chin as the U.S. Dollar continued its upward trend and concerns in Europe weakened global growth prospects. Crude oil continued its descent and was -4.7% for the week and closed at US$71.61. Since its 12-month high reached just over a month ago, oil is down 17.5%, a decrease that drivers don’t seem to experience at the gas pumps. Contrary to the rout in resources was gold. Gold usually trades in tandem with the Euro and is negatively correlated with the U.S dollar as it is seen as an alternative asset to the U.S. currency. However, gold has been trading outside its normal behavioural pattern as the metal is currently being bought as a safe haven asset and hedge against currency volatility. Bullion hit its all time high on Wednesday flirting with the US$1250/oz level to close at US$1 243/oz.

Earnings Season

Earnings season in North America has pretty much come to an end. In Canada, 181 out of the 222 companies in the S&P/TSX Composite have reported with 93 of them exceeding estimates. In the U.S. it was a much rosier story with 460 out of the 500 companies in the S&P 500 posting their numbers with 77.1% of them having better than expected results, and only 15.1% surprising on the negative side.

The Week Ahead

The economic calendar is quiet in Canada with only CPI and retail sales numbers coming out at the end of the week. The U.S. is much busier with PPI and CPI out on Tuesday and Wednesday respectively, and Thursday rounding out the week with the Philadelphia Fed, Leading Indicators, and the Initial Jobless claims numbers. On the earnings front, nothing substantial in Canada until the last week of the month when the major banks will report, and in the U.S. the home building retailers are on tap along with heavy weight retailers Wal-Mart and Target.

Download PDF

Copyright (c) 2010 Richardson GMP Ltd.

Tags: American Markets, Angela Merkel, Bailout Package, Bailout Plan, Canadian Market, Chancellor Angela Merkel, Commodities, Currency Markets, Debt Problem, Debt Problems, Debt Purchases, Earnings Season, European Leaders, German Chancellor Angela Merkel, German Television, Gold, Gold Bullion, Italy Greece, Josef Ackermann, Loan Package, Loan Plan, P500, Serious Situation, Sovereign Debt
Posted in Canadian Market, Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, US Stocks | Comments Off

Offshore Oil The Warren Buffett Way

Monday, February 15th, 2010

By Dian L. Chu, Economic Forecasts & Opinions

Commodities, particularly crude, were trending down last week after China’s Central Bank raised bank reserve requirements boosting the US dollar against other major currencies. That marks the second time China has raised its bank reserve requirement in a month.

Ongoing worries about the economy stemming from European debt problems, specifically the lack of a firm Greek bailout plan from European leaders also prompted investors moving out of risky assets. Crude oil fell for the first day in five to below $75 a barrel also partly due to government data showing U.S. inventories rose more than forecast.

Meanwhile U.S. natural gas registered the largest one-day gain last Friday to $5.48 per mmbtu since the beginning of the month on a drop in jobless claims, signaling industrial demand is likely improving, and cold temperatures across the US are boosting residential demand. Industrial Demand accounts for 29% of U.S. consumption.

Oil Services Sector Bottoming Out

While the markets are in a finicky mood from the China and Greek factors, the return of relative stability in oil and natural gas prices has spurred producers to increase their capital budget and restart projects they slowed down or completely deferred a year ago. (Fig. 1)

Absorbing the impact of lower rig counts, weak global demand for fossil fuel and volatile energy prices, the majority of the oil services companies are reporting sharply lower earnings in Q1. However, the rising rig count and producers’ capital budget suggest that oil service markets are probably in the process of bottoming this year, which suggests a good entry point for long-term investors. (Fig. 2)

Oil Majors Go Deepwater & Subsea

Roughly from 2004 to 2008, the onshore, North America in particular, had outshined the offshore in terms of activity growth. But the Great Recession has shifted the tide towards offshore and international. Offshore is one of the few remaining places where the state as well as western oil majors can increase production, while emerging Asian demand is expected to outpace the U.S. and the OECD in coming years.

FBR estimates an increase in deepwater spending of almost triple expected growth in onshore spending will drive offshore spending overall at a rate of around 15% for the next few years. Energy consultants Douglas-Westwood also forecast offshore spending recovering to $439 billion in 2010, up 11% from 2009 with deepwater capital expenditure reaching new highs. (Fig. 3) South America, Mexico, Iraq, Russia, Africa, and the deepwater are the key areas.

Subsea has proven to be considerably more resilient in the downturn, and the secular growth story will continue to improve as the deepwater rig count is expected to increase by 30% in 2012 from 2009 and as projects get more complex and require greater amounts of equipment.

Offshore Infrastructure – The Buffett Way

Warren Buffett made headline last year when he placed the biggest bet of his life with the $34 billion purchase of Burlington North Santa Fe, expecting the infrastructure play will grow as the economy gets back on solid ground.

So, if we apply the same investment strategy as Buffett to the oil services sector, offshore infrastructure will be the logical choice.

Americans vs. Europeans

While oil companies typically fund and own the pipeline, platform, etc, they rely on oil services companies to provide project expertise and resources.

The oil services universe is made up of mainly two camps: Americans and Europeans. American firms such as Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) tend to have a stronger focus on drilling and production services mainly due to the existence of a vast American market, and higher margins.

The European firms, on the other hand, have essentially positioned as specialists in offshore drilling, infrastructure engineering and construction related services.

From Europe with Backlog

Therefore, the current offshore and deepwater trend bodes well for the major European service companies such as Saipem SpA and Technip SA (TKP).  Theses two companies are leaders of the European pack dominating in high-tech segments for deepwater activities such as the installation of platforms, the laying of subsea pipelines, the development of subsea fields, etc.,

The oil infrastructure business is generally later cycle and backlog driven, and thus tends to have less volatility in earnings than other energy stocks. That means even if we go into a double dip, these stocks should still be able to generate higher earnings.

Favorable Forex Trend

Dollar appreciation is also a major catalyst. Société Générale estimated that a 10% increase in the dollar translates into an 8% to 10% increase in EBIT for the oil services sector. All oil services companies should benefit but those that combine a sizeable proportion of dollar-based assets with borrowing denominated essentially in euros, for instance, Saipem and Technip (TKP), stand to benefit most.

Furthermore, with euro recently plunging to a near nine-month low amid Greek concerns, the downward momentum is favorable for U.S. investors wishing to add positions in some solid European companies with good long term prospects.

Americans with Niche

All is not lost with the American companies. Large manufacturers of capital equipment such as Cameron (CAM) are poised to benefit as well, since the tender activity for deepwater rigs, subsea equipment, surface, valves and compression will likely accelerate in 2010 with oil companies gaining confidence in the commodity recovery.

Drillers & Seismic – Grinding Ahead

Nevertheless, all services are not created equal. Average day rates for deepwater floating rigs have fallen from up to $550,000 to $350,000. So, the next two years are going to be a grinding period for drillers like  Transocean (RIG) and Diamond Offshore (DO) when they have to roll over old contracts at lower rates.

Meanwhile, seismic companies such as CGG Veritas (CGV) and Petroleum Geo-Services (PGS) are still struggling to find a bottom mainly due to vessel overcapacity on the marine side. The sector is also hammered by clients’ preference to use old data instead of shooting new ones in a bid to cut costs.

So, the downward earnings trajectory could signal a buying and/or shorting opportunity depending on investment time frame and strategy.

Oil or Gas, One Sector Does It All

Energy stocks, including shares of services companies, tend to be higher beta, so the sector still has to balance the downside risk of the global growth environment. But as the world journeys on a recovery path, likely with rising oil and gas demand, there is still a significant multi-year opportunity for earnings growth from the oil macro view. (Fig. 4)

In addition, oil services is one sector that stands to benefit from the expected uptrend of either crude or natural gas, or both. With crude and natural gas prices outlook remain diverged in the medium term, this unique characteristic could be a good hedge in any energy/commodities investment portfolio.

Disclosure: No Positions

Tags: Bailout Plan, Capital Budget, Cold Temperatures, Commodities, Economic Forecasts, energy, European Leaders, Global Demand, Government Data, Jobless Claims, Mmbtu, Natural Gas, Natural Gas Prices, Natural Resources, Offshore Oil, oil, Oil Majors, Oil Service, Oil Services, Relative Stability, Rig Count, Risky Assets, Russia, Service Markets, Term Investors, Time China, Warren Buffett
Posted in Commodities, Energy & Natural Resources, Infrastructure, Markets, Outlook | Comments Off