Market Talk

The news headlines certainly aren’t bullish today, but gloomy news seems to be little match for the bountiful liquidity traversing the globe.

From Newswires Tom Fairless in Frankfurt:

Use of the European Central Bank’s emergency marginal lending facility rose further Thursday after hitting its highest level in more than 19 months Wednesday, the ECB said Friday.

This thing set off some bells yesterday when the borrowing spiked up Wednesday night to about 16 billion euros (daily average was around 700 million), highest since mid 2009, but no one could discern any stress in the financial system. Well, maybe they’re not looking hard enough because the borrowing was up big again last night, as Fairless notes.

The first time was generally played down as some aberration, perhaps even a fat finger, and it seems observers are still working that line. Maybe one time,  chalk it up as some kind of mistake. But two days in a row? This just doesn’t smell right, folks.

Story quotes Unicredit economist Marco Valli who says the borrowing may reflect “that a bank or banks are tapping the overnight facility as they wait for next week’s main refinancing operation.” Really? Why hasn’t that happened before, and if it has, why are these amounts so high?

He adds that there is “no perception that some banks are suddenly facing big problems.” Yeah, and there was no perception banks here in the US were facing big problems three years ago, either.

Here’s a classic dog-ate-my-homework attempt at an explanation, from a guy at Commerzbank: “My explanation is that someone forgot to bid at the main weekly refinancing operation,” said economist Michael Schubert.

Forgot to bid? Good one. And now has to borrow at the facility’s “punitive” rate of 1.75%? Imagine the conversation with his boss.

There’s an odor on this thing, and demands better explanation. Hopefully we’ll see one soon.

Addendum: FT’s Alphaville has an item that sheds some light on the situation, but still unclear what’s behind the borrowing. Seems as if it was a mistake, it needs to be repeated until about next Wednesday or so, when all will be revealed.

The doctor said the clinical term for the condition is “davosis.”

It’s described as an annual sense of rising expectations that something important or transformative will be said or done, only to be quickly replaced by an empty, used feeling.

The origin of the malady’s name comes from Davos, Switzerland, site of the annual meeting of the World Economic Forum. Year after year, the business, academic and political elite gathered there to discuss “big global issues.” And despite the media’s ardent attempts to bring gravity and significance to the assemblage in the sleepy mountain resort, nothing important or significant ever came of the meeting.

There’s a few aspects of today’s market action — both here and in Europe — that border on the absurd, so might be best to enjoy these gains while you can as there isn’t much substance backing them.

The biggest charade is the “relief” unleashed by Portugal’s “successful” sale of government debt, and the outlandish comments coming from Portuguese officials following this exhibition. Here’s a sample, from Newswires’ Geoffrey T. Smith:

Portugal doesn’t need financial help from the European Union or the International Monetary Fund, Prime Minister Jose Socrates said Wednesday. Speaking to reporters at a trade fair…Socrates reiterated that the government is on target with its plans to reduce its budget deficit and that the economy is growing. “We are able to do our work by ourselves. We don’t need anything else than confidence,” he said.

See that? Just need a little confidence, is all.

Socrates also repeated that the country’s economy grew 1.3% in 2010, drawing an unspoken comparison with Greece and Ireland, whose economies both contracted. “By any point of view, [Portugal's deficit and economic growth] is a good result,” he said in a speech at the textile fair.

Guess he didn’t see this one yesterday, from Newswires’ Carla Canivete and Christopher Bjork:

The Bank of Portugal Tuesday forecast the Portuguese economy will shrink in 2011 as the government’s austerity measures take their toll on private consumption and warned that there are considerable downside risks to this estimate.

The bank pegs 2011 GDP at -1.3%, down from an autumn estimate of flat growth. Growth in 2012 only seen up 0.6%. Continue reading…

Stocks are rallying on the “success” of the Portuguese bond auction, but take a look at the yields they’re having to pay up. Some success. Meanwhile, the USDA came out with its first crop report for 2011. The Upshot? Don’t expect to prices going down at the supermarket.

It’s early in the week, but US stocks so far have been mainly fixated on the theatrics in Europe and their sovereign debt problems. Very fluid situation there, and that’s been reflected in some swooping climbs and sharp drops for the euro and US stocks today.

Meanwhile, Alcoa’s 4Q results late yesterday almost seem like an afterthought already, with the stock falling about 1% even as the bottom line beat analysts’ expectations, and outlook seems upbeat. The results were just fine, and most of the reports from the other 499 S&P 500 companies will likely be fine, too.

But we’d argue that “just fine” is well-priced into stocks today, and that’s the message in AA’s decline. More on that in a minute.

One report today that wasn’t fine was Supervalu’s fiscal 3Q, and the stock got punished, down almost 12%. Big bottom-line miss, with the company citing weaker-than-expected sales and margins, and while noting consumers remain under a lot of pressure.

Now, Supervalu has its own problems, a company acknowledged by management to be “in transition,” but their comments on the grocery retail space and state of the consumer are an interesting window into the economy overall. Continue reading…

Japan comes out says it will buy European debt. The market sighs in relief. Stocks rise.

Um, why?

Why would anybody consider it a good thing that Japan, one of if not the industrialized world’s most indebted countries, is the latest sovereign to jump into the European debt market? First China, now Japan. Is this not a sign, another in a long, long string of signs, that Europe’s problems are beyond its control? It’s comical at this point to hear yet another government official, in this case Portugal’s prime minister Jose Socrates, avow as that their country doesn’t need “help.”

It’s not that Japan is buying European debt. We’re fairly certain this isn’t the first time they have. But the fact that not only are they buying bonds for the bailout fund, but that they’re making such a big deal about it (and buying such a big chunk of it.) Sure, they’re trying to help keep the yen down. But they’re also looking at a major market that’s on the edge of something very dark.

This is a bad thing. It should actually terrify people that the Japanese have stepped in. We all know the U.S., though the auspices of the Fed and its open swap lines, has been up to its elbows in helping to prop up Europe. Last week, the Chinese made a big public show of getting involved. Now the Japanese are. What’s driving the world’s three largest economies to take very public stances in support of Europe?

Fear.

Continue reading…

Here’s your pop quiz for the day. Consider the following statement:

“Portugal will not need a bailout, ” Spanish finance minister Elena Salgado said Monday (subscription required for link, incidentally.)

Where did Ms. Salgado make this statement? Was it:

- A: in an interview on Spanish radio station Cadena Ser.

- B: open mic night at Chesterfield’s.

Okay, fine, it was A. But the line would’ve gone over better if she’d said it a comedy club. Because that line’s a laugh riot.

How many times have we heard that one? The housing market won’t collapse. Lehman won’t fail. Greece won’t need a bailout. Ireland won’t need a bailout. Do you see a certain progression here?

What makes Ms. Salgado’s statement all the more ironic is at the same time as it’s making the rounds, Der Spiegel is reporting that France and Germany are pushing Portugal to accept a bailout.

What Ms. Salgado is perhaps actually thinking about is the fact that if and when Portugal’s domino falls, the next in line is Spain’s, and that’s when it gets really interesting. Because Greece, Ireland and Portugal are relatively small economics. What makes them dangerous is this whole globalized, interlinked economic system. But Spain is the world’s seventh largest economy. If it needs a bailout, especially coming after three previous sovereign bailouts, it will seriously test the steel of Europe. As Satyajit Das writes over at naked capitalism:

In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these.

EU/IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.

Based on the IMF’s best estimates, there is little prospect of many European countries returning to balanced budgets any time soon. Given the toxic conjunction of high cost of funding, low growth and high starting level of debt, it is near impossible for these countries to contain the spiral to a restructuring of their debt or default.

Hope you’re not still wondering about the effectiveness of the Fed’s QE2 program, as there should be no more debate: Dow Industrials close at their highest level since August 2008; S&P 500′s highest close since early Sept 2008; go back almost three years to see Nasdaq close at this level.

Fed officials have proffered that one ambition for QE2 was to help increase stock prices. Well, mission accomplished so far. Sure, it’s lighter, pre-holiday trading, but gains are gains, right bulls?

Feel wealthy, citizens? Case closed.

Financials soar, followed by materials and energy. CAT, IBM and JPMorgan contribute 50% of the Dow’s gain. DJIA rises 55.03 to 11533.16, and Nasdaq Comp climbs 18.05 to 2667.61. S&P 500 ends 7.52 higher at 1254.60. Continue reading…

The euro earlier slumped to a session low $1.3072 vs US dollar (after earlier rising to $1.3202), continuation of a drop sparked when the Fed announced it will extend existing US dollar swap line facilities with a handful of foreign central banks.

US stocks appear generally oblivious to the develop, which could be chalked up to a simple focus on wrapping up the year’s business, and trying to grind out more gains in thinner, pre-holiday, formulaic and mechanical trading. Slap the blinders on and buy.

The Fed’s swap-line extension is telling — it’s reinforcement that the debt problems in Europe have a certain intractability, a stubbornness that won’t be dissolved by wishful thinking, promises of new “support mechanisms” or kind words from the Chinese. Continue reading…