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…

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.

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…

Stocks fall, but call it a moral victory for bulls who perform another one of those escapes that would make Houdini grin. Markets shake off ongoing concerns about euro-zone’s debt problems and erase much of their early substantial losses.

For the past several months, US markets have pulled moves similar to this with collaboration of a weaker dollar/stronger euro, but neither was present today. It almost looked like a reversal based on sheer will alone. Perhaps there was some of that, inspired by S&P 500 holding a critical level around 1174. Continue reading…

Paul Krugman states it bluntly: the Irish people are suffering for the sins of the bankers. Meanwhile, Iceland told the bankers to go scratch (or, more specifically, the banks’ creditors,) and that country seems to be doing better.

For the record, the U.S. went more Ireland than Iceland. From the NY Times:

At this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump.

None of these heterodox options are available to Ireland, say the wise heads. Ireland, they say, must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

The bipolar stock market is having another “episode.”

Talk about forgive and forget. At this time yesterday, investors were jolted by North Korean aggression vs South Korea, and ongoing economic and political turmoil in Ireland as well as fear it would spread to other peripheral euro-zone nations. Or was that just a weird dream we had? Seems now as if it never happened.

We know the general populace’s attention span has been whittled to almost nothing (unless, of course, someone mentions “Call of Duty: Black Ops”), but this is just bizarre.

Now, we’re not saying the stock market should be cratering today, but yesterday’s sell-off seemed to stem from some legitimate, serious, fundamental-type concerns. An intractable debt mess in Europe, and an equally intractable situation with a highly unpredictable North Korean regime. Both have credible potential to create chaos, political and economic. Continue reading…

We cringed last month when we read the FOMC’s September 21 meeting minutes, specifically the part where the committee said stresses “in European financial markets remained broadly contained,” but bore watching.

It was the first time, as far as we could tell, that they’d used the term “contained” in that context since the committee’s infamous assessment that the subprime-mortgage turmoil back in early 2007 was “relatively well contained.”

Well, we know how that worked out, right? Not contained…at all.

And neither are the stresses in European financial markets, as it turns out. In fact, it’s looking anything but contained at this point, as fears of contagion from Ireland increase.

The lesson here, of course: When the Fed says something appears “contained,” run the other way.

Notice that in the FOMC minutes released today from the meeting earlier this month, the committee doesn’t say any thing’s “contained.” They actually don’t mention much about Europe, except to say that sovereign-debt spreads had either declined or were little changed — except in Ireland, where “spreads moved higher on concerns over the fiscal burdens associated with losses in the Irish banking sector.”

Bears are aiming for some follow-through to yesterday’s sell-off in US stock markets. Asian markets fell sharply overnight, with concerns about interest-rate hikes in China being cited as the catalyst, and European markets are edging lower as sovereign debt concerns — particularly in Ireland — continue to fester.

Interesting complexion premarket, with recent correlations — both positive and negative — appearing to loosen a bit . Euro recovering from big drop overnight, USD index softening, oil and gold in retreat (even as
the dollar eases) and Treasurys a shade lower.

Only data on tap is Reuters/Univ of Michigan prelim Nov consumer sentiment gauge, out at 9:55am ET. S&P futures down 9.30; 10-yr note down slightly, yield at 2.66%.

It’s been more or less an easy one-way trade for a few months now, ever since investors realized that the Fed would provide plenty of cheap money to chase after riskier assets. Fundamentals were pushed into the background as the Fed’s m.o. became clear, and stocks, the euro and commodity prices soared as the dollar got hammered.

Cisco’s stock-price dive today, as well as the euro’s spirited retreat this week, serve as stark reminders that fundamental factors — like sales growth and dodgy sovereign debt — still matter.

Certainly, strong corporate earnings have helped stocks, but the growth trend is clearly slowing. Companies have boosted profits mainly by cutting costs, and most of the low-hanging fruit there has been picked. Now, more and more companies are seeing increasing costs as commodities rise (thank you, Fed, for that weak dollar), fewer areas to trim costs, increased competition on pricing and customers who are reluctant to pay more.

Not a recipe for stronger profits ahead, particularly as the US economy remains unsteady, high unemployment is still entrenched and consumer demand is subdued, at best.

Take heed on this day, citizens. QE2 is no elixir for what ails the US economy, and it’s pumping effect on stocks can’t last forever. Eventually it always comes back to expectations for future profit growth.

This may only be brief reacquaintance with the importance of fundamentals on stock prices, but it’s a sobering indication of what may be in store when the refocus becomes more keen. Cisco shares down 15%.

Stronger dollar, sliding euro set the stage for an overdue moderate pullback in US stocks. Equity markets have been on a relentless climb for weeks, fueled by prospect of cheap, easy money, so a breather here is well-warranted.

Call it inflation jitters, or concerns about European sovereign debt or even anxiety about demand for US debt, if you’d like. Financials hit hard; materials and consumer discretionary also a focus for sellers. Treasurys also see sharp selloff. Perhaps a hint of doubt about QE’s power to keep pushing up asset prices? Drop in Treasurys and stocks certainly an attention-grabber.

DJIA falls 60.09 to 11346.75, and Nasdaq Comp sheds 17.07 to 2562.98. S&P 500 ends 9.85 lower at 1213.40 amid an uptick in volume.

Weekly jobless claims due tomorrow, with Veterans Day government holiday Thursday (bond market also closed Thu). Sept trade deficit, Oct import prices also due tomorrow.