Market Talk

A dose of cautionary comments on three things that seem to only go up lately: the euro, stocks and corporate earnings.

First on the euro, which surged through $1.43 today its highest level vs USD since January 2010, and looks as if it’s left any and all concerns about sovereign debt in the dust.

Nomura says in a report that it’s too early for the euro to shed that risk. “The uncertainties about the economic outlook, debt dynamics, and the political framework around managing sovereign insolvency are simply too great,” firm says.

It estimates “a debt restructuring isolated to Greece/Ireland/Portugal would trigger direct and indirect losses around $240bn for core Eurozone banks, while bank losses would rise to $480bn in a restructuring including Spain.” German banks have the largest exposure to the periphery, Nomura says, with estimated losses of $185B in a restructuring scenario involving Spain.

Implied risk premium on the euro “has compressed significantly since January,” firm says, as the single currency “decoupled from sovereign risk.” That process “has probably run too far at this point: a persistent risk premium is still needed.”

On to stocks and some thoughts from BofA Merrill small-cap strategist Steve DeSanctis. He points out that weaker economic news, higher energy prices and disaster in Japan tripped up stocks in early March, but a “liquidity driven rebound” has put the Russell 2000 within 1% of its all-time high.

“Volatility came tumbling down despite the fact that none of the earlier concerns…have been resolved,” he writes, and small caps “are now very close to the full year’s return we have been expecting.” DeSanctis says he’s been “taken back by the strength of the overall equity market and in small caps in particular given the economic backdrop and where absolute and relative valuations stand,” and thinks 1Q earnings estimates are too high. Continue reading…

Stocks had a strong week, bolting higher in a stout rebound after the sell-off instigated by Japan’s earthquake/tsunami/nuclear crisis nightmare. A nightmare that’s still ongoing, by the way.

Oil didn’t move much today, but energy stocks led the way, along with the material and industrial sectors. IBM, CAT, Chevron and Exxon Mobil account for almost 80% of the DJIA’s advance. DJIA rises 50 to 12220, Nasdaq Comp adds about 6 to 2743 and S&P 500 grinds out 4 to 1313.80.

What’s most impressive about the week’s gains is that they came amid a cascade of unpleasant headlines. Leaking radiation; European debt problems flaring up again; horrendous housing data; weak durable goods orders; another commitment by US military forces as civil war rages in Libya; spreading unrest in Middle East and North Africa; and oil prices marching higher. And of course, that air-traffic controller sound asleep in the DC tower. Horrifying. Continue reading…

The tone remains bullish for stocks this morning as the ongoing stream of liquidity provided by the Fed’s QE, and more recently by Bank of Japan, courses through global markets. Stocks were strong in Asia overnight, currently higher in Europe and US stock futures point to a higher open.

As of yesterday’s close, major US indexes have erased declines following the Japan quake/tsunami/nuclear crisis. Risk aversion remains just a dalliance, a mere gesture now and again, even as the litany of stresses and perils around the world hardly ever seemed higher.

A third look at 4Q GDP due at 8:30am ET, and final look at Reuters/Univ of Michigan March consumer sentiment at 9:55am. S&P futures off their earlier highs, up 3.60; 10-yr note up a little, yield at 3.39%.

With all the compelling news coming out of Libya, the Arabian peninsula and Japan, it’s been easy for investors to overlook the festering sovereign-debt crisis in Europe. But it may come back onto the radar this week, like tomorrow.

Our colleague Min Zeng penned the following missive:

The financial markets are shrugging off the turmoil in Portugal and Ireland today, yet Andrew Brenner, head of emerging markets at Guggenheim Securities, says these two could lead to more volatility in stocks and bonds Wednesday when Portugal’s legislators are scheduled to debate the budget plan. Brenner says Portugal’s main opposition party said they will not support budget cuts so if the budget isn’t passed, Portugal could be forced to ask for funding from the EU. In Ireland, the continued disagreement between Germany and Ireland over corporate tax rates continue to plague negotiation for possible interest rates reductions from the bailout funding for Ireland, he says.

The Journal has a story on Portugal’s budget dilemma. There were reports earlier this week that Portugal’s going to seek a bailout no matter what happens with this vote, but if the measures are rejected, it would force the nation to seek a bailout within a few weeks.

As an indication of how jittery European debt markets are, Ireland’s debt (junior debt, mind you) tanked after after a rumor went through debt markets that Allied Irish Bank missed a coupon payment. The rumors were denied, and the market calmed down, but Ireland’s 10-year bond yield was pushed up to 9.658%. They later fell to 9.278%, for whatever that’s worth.

It’s a good thing the Europeans agreed to that new, permanent bailout fund. They’re gonna need it.

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.

Didn’t have much time to lift my head up to take a look around at what’s happening in the world today, but here’s a few things that caught my eye.

- NY Fed President Bill Dudley in comments today said enough bad stuff about the economy in order to justify continuing the Fed’s $600 billion bond-buying escapade, and enough good stuff about the economy to encourage bulls and performance chasers to keep buying stocks. Here’s a couple of examples of headlines showing the Fed trying to have its cake and eat it too:

Fed’s Dudley: Current Economic Situation ‘Unsatisfactory’
Fed’s Dudley: US Economic Situation Is ‘Considerably Brighter’

To Dudley’s credit, he did say the drop in January’s unemployment rate was “not an unmitigated positive,” as fewer people were actually out looking for jobs.

- Story on the top of WSJ today — “Mideast Unrest Spreads” — didn’t exactly spook stock markets. Perhaps it should. There’s a certain complacency about the events in Egypt that seems a bit mystifying, as if everyone’s convinced this transition from 30-year dictatorship to well-heeled democracy will be smooth as silk. The DJIA is up about 2.4% since the protests began on Jan 25, while the S&P 500 is up 3.2%. Hardly missed a beat. Meanwhile, protests flared in Iran, Algeria, Bahrain, Yemen and Jordan and it’s hard to imagine there’s a lot of pro-US sentiment swirling amid the Middle East upheaval.

Like Europe’s sovereign debt problems, this thing is only on simmer now, but could easily heat to a rapid boil at any time. Continue reading…

Once again it looks as if the Dow Industrials’ winning streak (now at eight straight sessions) may be in jeopardy, but it would be foolish to underestimate the bulls’ ability to turn things around, especially late in the session.

“These days, opening indications and actual closing prices are two very different animals,” Barry Ritholtz noted earlier at the Big Picture. He has a precise summation of how the bull vs bear battle has gone during the past several months:

In the face of massive liquidity of QE2, there remains a firm bid beneath this market. So far, losses have been modest to minuscule, with selling pressure well contained. M&A, share buybacks, anything but disappointing earnings are an excuse to put on the rally caps. Even dips are an excuse to buy. (We are running 53% cash on specific name selling, not overall market calls).

The bears are bloody but unbowed — they know a correction is imminent. But the bulls have heard this line for nigh on two years, and yet still the market still powers higher. The Dow, S&P and Nasdaq are all at multi-year highs. There is a difference between being early — a matter of days or weeks — and wrong. So far, the bears have been wrong.

Eventually, the grizzlies must be fed. They have their champions, including various Fed Hawks, who are terrified of an inflationary spiral. Lacker, Plosser and Fisher may be mortal enemies of price instability, but they are friends of Yogi and Boo-Boo and Baloo, well known amongst ursines for their opposition to easy money. And easy money is a bull’s best friend.

Even the most ardent bull knows that this too, will pass. The bears will have their day, before their next bout of hibernation.

The 64 trillion question: When? Continue reading…

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…

Early mood is positive for US stocks, as Portugal’s bond sales are deemed a success.

Not a surprise, since central banks around the globe have every interest in making sure the auction went well. Euro has come off earlier highs, recently at $1.297; stocks in London post modest gains, while advances in Paris and Frankfurt are stronger.

Activity in Europe and its debt theatrics have steered US stocks so far this week, but focus should begin to shift more toward 4Q earnings as the flow of reports begins to pick up. Intel reports tomorrow, JPMorgan Friday. December import prices due at 8:30 a.m.; Fed’s latest Beige Book out at 2:00 p.m. ET.

S&P futures up 7.20; 10-yr note lower, yield at 3.39%.

David Stockman, former budget director in the Reagan administration, has been banging this drum for a while if I recall correctly, the one about the inevitable crisis the U.S. is setting itself up for if it doesn’t change its ways. Still, he makes some very good points in an interview with Raw Story, at the same time saying we need to shrink the military, and lamenting that even with a purportedly leftist government the subject isn’t even being discussed.

The problem, the reason everybody in Washington talks about the debt but nobody’s willing to take a stand, is because they don’t have to. For one thing, the Fed is making the cost of borrowing absolutely negligible. For all intents and purposes, Washington these days has a blank check. The other thing is, the government is trading on the name and standing of the United States. The thought of the U.S. defaulting is almost unthinkable (it used to be absolutely unthinkable, but the Panic of 2008 and aftermath we’d imagine put some shadow of a doubt out there.)

So the federal government can issue as much debt as it wants. Any day of reckoning is still more than an election cycle or two away, and that’s as far out as our current breed politicians can think. Besides, if the feta really hit the fan, they could always just sell a national park or two.

The whole Stockman piece is worth reading. Here’s a taste:

“So the addicts in Washington are now unfortunately terrified to stop all this borrowing whether it’s for guns or butter for fear of the economy will collapse…That’s why we’re just at the beginning of solving this massive financial collapse we had in 2008 and not in the process of healthy recovery as some of the pals in the White House or on Capitol Hill or on Wall Street would have you believe.”

Continue reading…