Market Talk

Got to get outta dodge and head home, but here’s a couple more opinions on the whole Egypt story for your evening commute.

Read Jerry Seib’s excellent take on not only what’s happening right now in Egypt, but what it means in a historical sense. He notes there have been three distinct phases to Mideast politics since the 1950s, and…

A fourth phase likely started over the weekend in Egypt. But whether the political “reform” movement in Cairo’s streets turns out to be a positive or negative turn for the region—and for the U.S.—depends much on Hosni Mubarak, Mohamed ElBaradei and, to a lesser extent, Barack Obama. If history is any guide, it may take months, if not years, to know precisely the outcome.

On that angle, Dennis Gartman, who edits and publishes the closely followed Gartman Letter, has this to say about the historic import of the day:

We’ve no idea how the current turn of events shall play out in the coming hours, days, weeks, months or perhaps even years. These are events unlike any the world has seen since the post-French Revolution Era when revolution swept across the world. When the brilliant Chinese political leader, Zhou En-Lai, was asked in the 1970’s what he thought of the French Revolution, he replied, wisely, “It is too early to tell.”

He was right. It was too early to tell even almost two hundred years after the events.

Gartman notes that the Russian Revolution of 1917 actually started in 1905 with a peasant uprising. An uprising of starving peasants. There’s that food prices angle.

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US stocks shake off the anxiety over everything going on in Egypt and climb, taking back at least a portion of Friday’s losses, after Exxon posts a big jump in 4Q profits.

DJIA rises 68 (0.6%) to 11892, largely led by Exxon and Chevron. S&P 500 jumps 10 (0.8%) to 1286, Nasdaq Comp adds 13 (0.5%) to 2700. Finish at session highs. Crude futures rise, too, another 3.5%, as the odds of a regime change in Egypt grow.

There’s just no telling where this thing’s headed, or if it goes past Egypt. Still, so far no signs of any disruption to the Suez Canal, or the flow of goods.

Dallas Fed’s January Texas Manufacturing Outlook survey showed a notable drop in its general business activity index, to 10.9 from 15.8. Ten of 15 monthly indicators fell in January vs December.

The production indicator collapsed more than 15 points to just 0.2, while capacity utilization fell to 4.1 from 18.8. Of the five indicators that increased, the two biggest jumps were in prices paid for raw materials (spike to 62 from 43) and prices received for finished goods (to 19.4 from 11.9).

And the Dallas Fed’s key takeaway: “Texas factory activity held steady” in January.

Held “steady”? They must be redefining the term, because last we checked, the word meant “firmly fixed or stable”; “Not changing movement, direction or quality.” There’s nothing “steady” about this report, citizens. Feel free to take a look for yourselves.

The implications for inflation expectations look particularly unsteady. “Sixty percent of respondents anticipate further increases in raw materials prices over the next six months, while 40 percent expect higher finished goods prices,” the report says.

Addendum: Don’t miss the last two pages of the report, with comments from businesses on their hiring plans. Here’s a little taste from a commenter in food manufacturing:

We need significantly more business to justify hiring additional people. In this uncertain economy and with little peace of mind about what regulations or policies might be implemented…we will not hire anyone until we absolutely need them.

Photo courtesy of Wiki Commons.

We’ve previously skewered here a couple times the cockamamie notion that companies panicked and fired too many workers during the recession. That supposition was popular about a year or so ago as economists and other pundits forecast a big snap-back in employment that was supposed to arrive after last year’s midpoint.

The hiring snap-back never came, of course, and companies are the better for it as they finished 2010 with amazing profit growth. As we’ve noted before, there never was any panic — just cold, hard calculation on how to regain strong profitability in an environment of greatly diminished demand.

And it continues, with UK gas and electric operator National Grid PLC saying it’s cutting 1,200 jobs in its US business in a restructuring effort.

As reported by Newswires’ Selina Williams, note the words of National Grid CEO Steve Holliday regarding the layoffs: “It’s not a knee jerk, it has been thought through for some time.” He went on to say that despite increased revenue, the company was not earning adequate returns in all its US businesses. Operating costs “are still higher than we are recovering through today’s rates,” Holliday added.

I’ll tell you what, if I’m Hosni Mubarak, I’ve got my bags packed. “Just in case” more and more looks like you can just remove the “just.” And the “in case.”

The surge against the Mubarak regime continues to build steam in Egypt, and all the latest headlines point toward his eventual ouster. The one that really puts it over the edge, far as I’m concerned, is the bit from the Obama administration, which called for an “orderly transition” to a new government. They stressed that they weren’t calling for Mubarak’s ouster, but that’s a fig leaf at best. Obama sees the handwriting on the tank.

Then’s there the stance of the army in Egypt. Here, too, it’s not looking so hot for Hosni. The army has stated it won’t use force against the people and opined that their complaints are “legitimate.” That’s not just an air quote for the sake of it; that’s what the army said.

Now the protesters are trying to get a million people to march in Cairo tomorrow, and governments and businesses are scrambling to get their people out. The protests are only growing in size, incidentally.

So the only real question now is what the new government will look like, how will it address the grievances of the Egyptian people, how will it comport itself with its neighbors and the world at large. Also, will the protests continuing spreading, and topple other governments. Actually, that’s several questions. Several big questions.

While most businesses in Egypt have been shut down, the Suez Canal is still operating normally. Regardless, crude oil futures in Europe topped $100/barrel (subscription link) and $90/barrel in New York. Stocks in New York are modestly higher, but the market is reacting more to its own internals than the geopolitical externals. I still think the sell-off Friday had as much to do with a market that was poised for one as it did the events in Egypt, which is what I said on Friday’s News Hub.

All this is making Israel very nervous. As we’ve said, there’s no guarantee the events unfolding will lead to governments more friendly toward the west and Israel; it’s a good bet to go the other way, in fact, if for no other reason than that the social problems besetting citizens in Egypt and across the Mideast, high unemployment, rising food prices, aren’t easily fixed, no matter who’s running the show.

It’s always easier to find a scapegoat than solve problems, and the U.S. and Israel have been convenient ones in the Middle East for decades. Israeli Prime Minister Benjamin Netanyahu said Egypt’s revolution could end up producing a regime like Iran’s, a radical, hard-line Islamic ruling party, after the fall of the Shah. Seeing as the Israelis have been very careful about what they’ve said during the past week, this speaks to the level of anxiety in Israel.

Still, it’s happening. Anybody want to take bets on whether Mubarak lasts the week?

We may have to just turn the Markets Hub into a live, 24-hours a day show, because the markets keep turning on us.

When we taped today’s video, crude was flat, and stocks were flat. Since then, crude prices have jumped 2% and stocks have jumped as well, with the Dow lately up 65 points. There haven’t been any dire headlines out of the Mideast, but you can bet for crude prices at least that’s the source of it.

As for stocks, seems investors are trying, in the absence of any dire breaking news, to try and claw back some of Friday’s losses.

Anyhow, here’s this morning’s show. Runs a little long because I jumped on the soapbox.

This headline just crossed the Broadtape:

Obama Admin Tells Americans To Eat Less, Eat Better

I wonder if Hosni Mubarak tried that line recently?

I mean, like, uh, no duh, Mr President. You bet we’re eating less.

What with food prices rising across the globe, with more than 14 million Americans unemployed, and the vast majority of the middle class seeing its wages stagnate, you can bet your Yankee Doodle Dandy some Americans are going to start eating less. Or, some Americans already are eating less.

Okay, so the headline was about the new dietary guidelines from the USDA. But, you know, I’m on this food prices thing, so everything just looks like an out-of-control inflation story to me.

(Photo: Library of Congress)

We are seeing more comments and analysis about the effects of rising food prices as a cause of the unrest sweeping the Middle East (and not just the Middle East, by the way. Anybody else notice their grocery tab going up? I know mine has.)

Looking at live quotes on my FactSet terminal, corn is up 1.2% this morning. Wheat is up 1.5%, and soybeans are up 0.6%. Crude oil, however, is down, as traders are ratcheting back a bit of the fear that drove Friday’s spike. Stocks are flat.

The market has done its usual mental gymnastics, and determined that what’s happening in Egypt is primarily a political issue. The Suez Canal is operating, so it’s not an issue to the markets. But that’s short-sighted. Because the real cause, I’m trying to tell you, isn’t just political. And it isn’t just limited to the Middle East. (We touched on this on this morning’s News Hub.)

There was this comment this morning from Chotaro Morita, head of Japan fixed-income strategy at Barclays Capital Japan, in our pan-Asian market commentary:

The short-term situation in Egypt is uncertain, but if the main cause of the surge in commodity prices since last year has been excessive monetary accommodation by developed economies, especially the U.S., then the macroeconomic policies aimed at balance-sheet adjustment in developed economies appear to have backfired by causing social unrest in developing economies and a further rise in resource prices.

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Earnings season is coming in stronger than expected:

With about 50% of companies already reporting, fourth-quarter profits for the biggest U.S. corporations have been exceptionally strong and 2010 is poised to deliver the third-best full-year gain since 1998—with sharp advances in the telecommunications and energy sectors and a rebound in financial services.

Excluding financial companies, whose losses in 2009 skewed results, weighted earnings for the companies in the Standard & Poor’s 500 Index are up 17% on an as-reported basis for companies representing 54% of the group’s market value.

Unlike the initial period of the recovery, when cost cutting strongly boosted profits, the results suggest a solid pickup in spending by businesses and consumers. Sales for the group rose about 9% from a year ago, according to S&P. Job cuts continue to be critical under tight expense controls.

S&P now forecasts fourth-quarter earnings will rise about 32% over a year ago when all 500 companies report, more than three times as fast as its forecast at the outset of this reporting season. Profits then were seen rising 9.8%, with sales expected to be up 6%, according to S&P.

Then you look at a company like Exxon, which this morning reported fourth-quarter earnings surged 50%, to more than $9 billion, on, you guessed it, rising oil prices. Not a bad time to be a major U.S. corporation.

Jam-packed week ahead for both US corporate earnings and economic data, and with Middle East unrest mixed in, it makes for a potentially potent cocktail of volatility.

Exxon Mobil reports 4Q results before the open. December personal income & spending due at 8:30 a.m. ET, along with NY ISM business gauge. Chicago PMI set for 9:45 a.m.; Dallas Fed’s Jan Texas manufacturing survey at 10:30 a.m.

Other notable data this week include January ISM, auto sales, chain-store sales, December construction spending, 4Q productivity and Friday’s January jobs report. Also, earnings from Pfizer, UPS and Merck, to name a few.

S&P futures up 4.7, DJ futures 20. Ten-year note slightly lower, yield at 3.34%. Crude futures up modestly, just under $90/barrel.