Archive - Jul 13, 2010 - Story

For what it's worth, here is the take of BofA's Kuni Chen on Alcoa, with a very surprising bearish read through: "We reduce 2010E EPS from $0.50/sh to $0.31/sh. Lower EPS outlook is driven by seq lower metal prices and seasonal demand. We are using avg 3Q aluminum price of $0.88/lb in our model. Our low-end estimate for 2011 is based on a $0.95/lb metal price. We lower our PO to $11/sh as lower 2H EPS impacts year end net debt position. The implications of Alcoa’s quarter may be a negative for Century Aluminum and Noranda Aluminum as the Street revises down estimates on lower metal prices." Not surprisingly, it is AA, KALU and NOR that are surging as the HFTs are once again being drawn to some Lorenz Attractor with the firm push of the PDs and the FED. Of course, BofA's most recent cut simply means that when AA posts 2010 EPS of $0.310000001, the stock will promptly hit infinity.

If we see retail sales follow the same precipitous one month drop of NFP, the YoY rate should drop from last months 6.9% to ZERO. Last June the index of retail sales was 343.1 vs. last month's 362.52 so zero YoY would mean that the monthly rate, expected to print -0.3% on Wednesday would in fact print -5.4%. Now that frankly seems like an inconceivable no. as it would be the worst number we've seen since the series started in 93. However, I have to think that even if we make up the divergence over a couple of months something like -2% tomorrow would cause people to fundamentally question the recovery. Personally, I think all we are doing is remove a lot of the noise created in the data by the census jobs and we should see retail sales drop back to the levels suggested by claims and possibly even the ABC consumer buying climate question. Unfortunately, that should cause people to question the recovery!

This morning we observe two very interesting resistances for risk. First AUDJPY tried yesterday and overnight to bypass its 50dma without success. Secondly we note on the S&P chart that the 50-dma for the continuous future is at 1,087 and we had the 61.8% retracement of the last sell off at 1,080. Similarly the Nasdaq is approaching the 61.8% retracement at 1,850. While I must admit the Dax does look bullish here, probably because the lower Euro provides some tailwind for German exporters, there is bearish divergence on the hourly there, and we can observe the same for the S&P here. We have retail sales tomorrow which I am told by my friend Julian Brigden of Calyon could well come in very weak. Similarly CPI could well disappoint and revive the deflation scares. On the flip side it's earnings season and the market loves to celebrates non sustainable earnings attained via cost cutting with weak consumer demand... - Nic Lenoir

The CSX earnings surge can be easily explained now that the rail company has cornered the China-US transportation corridor (what's that, it's an ocean? that's ok - the president will enact a law changing that). Because goods transit sure isn't using the dry bulk shipping sector, where the Baltic Dry has plumbed to a fresh 14 month low, continuing its longest drop in 9 years, down for a 33rd sequential day to 1,790 from 1,840. Don't look for any record numbers out of the China Customs agency or the US trade deficit in the next month.

• The spin is just hilarious: Alcoa profit surprise bodes well for economy, stocks (Bloomberg), Euro stocks gain on Alcoa earnings (Reuters) - so let's get this straight: a $30 million marginal "beat" in Alcoa Net Income is sufficient to push hundreds of billions in global market capitalization higher... brilliant
• The US Consumer is once again the driver of the world economy: the US May Trade deficit increased to $42.3 billion, far beyond expectations of $39 billion; also as reported, China trade deficit was worst since October (and ever, from the Chinese perspective) (Bloomberg)
• Abu Dhabi may make another "successful" investment, this time in BP (Bloomberg) - is this a precursor to another hang gliding incident?
• Extend and Pretend European edition - yet another confirmation that all European banks are insolvent, as they are all about to win a "reprieve" on Basel capital rules (Bloomberg)
• Satyajit Das: Debt shuffling will be a self-defeating exercise (FT)
• Goldman may seek another extension in SEC fraud case (Reuters)

In staying with the once again popular trend of beating much lowered expectations (see Alcoa), Greece, which had previously decided against auctioning off 1 Year Bills for fear of lack of interest, managed to place €1.625 in 6 month bills in which local institutions purchased the bulk of the auction as foreign interest was muted. According to the PDMA who apparently still tracks the charade of ECB bailed out Greek banks recycling ECB money to then buy sovereign debt, the auction produced a yield of 4.65 percent for 26-week T-bills, up from 4.55 percent in a previous April 13 auction. The bid-cover ratio was 3.64 versus 7.67 in the previous auction.

• Asian shares mostly lower despite Alcoa's positive earnings report.
• Avg housing prices in China fell in June for the first time in 16 mos, as govt checks speculation.
• China reiterates policy-tightening bias on property sector.
• Euro drops down to $1.2550 in early European trading.
• European banks poised to win a reprieve in Basel as regulators shape new capital rules.
• France's Sarkozy rejects tax increase, retreat on raising retirement age.
• Japanese stocks rise on profit expectations; metals retreat on fears of slowing China demand.
• Moody's downgrades Portugal's bond ratings to A1, growth prospects to remain weak.

Just headlines for now. According to Reuters, Israeli troops have not boarded the Libyan aid ship yet. We will provide more as we get it.

Moody's believes that the Portuguese government's financial strength will continue to weaken over the medium term, as evidenced by the recent and ongoing deterioration in the country's debt metrics. "The Portuguese government's debt-to-GDP and debt-to-revenues ratios have risen rapidly over the past two years," says Anthony Thomas, Vice President - Senior Analyst in Moody's Sovereign Risk Group. "This deterioration came about due to the government's anti-crisis measures and the operation of the budget's automatic stabilizers, such as higher unemployment benefits, when the economy went into recession." Looking ahead, Moody's expects the government's debt metrics to continue to deteriorate for at least another two to three years, with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively, before stabilizing once the budget has moved back into a primary surplus position.

Another real-time business index comes in well-below expectations, but nobody cares: all the market is pathetically focused on is that Alcoa "beat" a consensus EPS that it would have missed as recently as a week ago. As for those lucky few who still care about the fundamentals that are pushing the economy right back into the depression, perhaps the chief economist of the National Federation of Independent Business William Dunkelberg says it best: "The U.S. economy faces hurricane force headwinds and the
government is at the center of the storm, making an economic recovery
very difficult." Please don't let this prevent robots from gobbling up futures as AA manages a stunningly manipulated earnings beat. Some more on the NFIB from the release: "The
Index has been below 93 every month since January 2008 (30 months), and
below 90 for 23 of those months, all readings typical of a weak or
recession-mired economy. Seventy percent of the decline this month
resulted from deterioration in the outlook for business conditions and
expected real sales gains. Owners have no confidence that economic
policies will fix the economy." But who needs reality when you have companies gaming EPS, the FED buying futures, and HFT breaking markets on a regular basis.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 13/07/10