A study in contrast ...Market Update

The chase by Marty Cej:

Nothing brings events into stark relief quite so well as well-timed juxtaposition. Yesterday, an agreement to solve the European sovereign debt crisis that was long on promise but short on details sparked a global equity market rally, helping to push the S&P 500 towards its best month since Oct. 1974. This morning, profit warnings and job cuts from consumer-sensitive companies such as Whirlpool, Electrolux and Newell Rubbermaid stand out “like a rich jewel in an Ethiop’s ear.”

It’s this whiplash-inducing contrast that we’ll need to examine today because it is a dichotomy that investors will have to reconcile and act upon in the days and weeks to come.
Specifically, we need to take a look at Whirlpool’s remarkable earnings statement this morning and apply the company’s anecdotal observations and actions to the North American economy and consumer. Whirlpool, the world’s biggest household appliance maker, said it will cut 5,000 jobs and slash its earnings expectations due to “recessionary demand levels in developed countries, a slowdown in emerging markets and high levels of inflation in material costs.” Electrolux, the second-biggest appliance maker, said it will deepen cost cuts as sales volumes in mature markets fall to their lowest level in more than a decade.

The CEO of Newell Rubbermaid said the company will cut 500 jobs as part of a program labeled “Project Renewal” (you paid a consultant for that??) because of a “really tough macro environment.” I will add that within yesterday’s robust report on U.S. GDP was a line on disposable income, which contracted in the third quarter. According to National Bank Financial, that means “that Americans were drawing from their savings to finance spending. That’s an area of vulnerability for subsequent quarters for consumers, particularly if the stagnant labour market doesn’t pick up steam soon.” Next Friday sees the release of U.S. and Canadian employment data.

Turning back to the markets, we’ll need to take a careful look at the rally by the S&P 500 over the past month. At the open of trading, the U.S. benchmark is up 14.12 percent for the month, the best month for the measure since a 16.3 percent gain in October 1974. Who were the leaders? The laggards? Is the outlook for economic growth and earnings gains healthy enough to justify the rally? Did leadership shift over the course of the month?

Bill Strazullo, Chief Markets Strategist at Bell Curve Trading in Boston will help us identify the trends and anomalies in the world’s biggest stock market. He joins us for a half hour of analysis starting at 9 am.

We will also feature an interview today with Gord Nixon, CEO of Royal Bank of Canada. Gord sits down with Howard Green at 12:30 to discuss the euro-zone bailout package, the global economy, the Canadian banking industry and his bank in particular.

Our conversation with Don Lindsay, CEO of Teck Resources, follows at 1:00. Stephen Snyder, CEO of TransAlta, sits down with Michael Hainsworth on the Close at 4:40.
How’s that for a line-up? And yesterday we spoke with the CEOs of Methanex, Barrick Gold, Goldcorp., Potash Corp. and Cogeco, and one former Prime Minister. Let’s face it, the only thing that comes close to rivaling the BNN Greenroom happened in at Thanksgiving 1976 at San Francisco’s Winterland when The Band invited a few friends to jam with them at their final show. Or just about any night on the Dick Cavett Show in the mid-1970s.

Sterling Partners have ridden in on a fine Arab charger to rescue Mosaid from the clutches of Wi-Lan. Sterling has agreed to buy Mosaid for $46 a share, topping Wi-Lan’s raised-but-still-hostile bid of $42 a share. Calls are out.

In earnings, we are watching numbers from Merck, Chevron, MacDonald Dettwiler, Weyerhauser, Newmont, Transalta, Postmedia and Norbord.

Global Markets Jump on Europe’s Greek Debt Deal

October 27, 2011

By CHRISTINE HAUSER and DAVID JOLLY
Stocks rallied around the world on Thursday, pushing the broader market in the United States back onto positive ground for the year, after European leaders reached a deal to spread the pain of restructuring Greece’s debt and try to bring the crisis in the euro zone under control .

While the deal helped to restore confidence to the financial markets, analysts noted that questions remained about how it would be implemented. They also worried that fully fixing the problems of excessive debt and weak growth could take years.

Still, after days of anticipation, the markets put whatever uncertainties remained behind them, at least for now. Financial stocks in particular were up more than 6 percent.

The Dow Jones industrial average soared 339.51 points to close up 2.86 percent at 12,208.55, while the broader Standard & Poor’s 500 index was up even more, 3.43 percent, at 1,284.56 and the Nasdaq composite index rose 3.32 percent to 2,738.63.

The S.&P. moved into positive territory for the year on Thursday, up about 2.1 percent. The Dow was up more than 5 percent and the Nasdaq more than 3 percent for the year.

Stocks closed up as much as 6 percent in Europe, after a strong showing in Asia.

It was a marked turn-around from just a few weeks ago, when anxiety over the European debt crisis helped push Wall Street to the brink of a bear market. On Oct. 3, the S.&P. 500 was down 19.4 percent from its high on April 29.

The latest news from Europe came early Thursday, when officials from the European Union and the International Monetary Fund reached a deal with bankers to write down the face value of their Greek debt by 50 percent, hoping to reduce the ratio of the country’s debt to gross domestic product to 120 percent by 2020. Economists believe that is essential if Greece is not to default on its loans.

Officials also agreed that European banks would need to raise more capital and said they would increase the euro zone bailout fund to $1.4 trillion, a move that they hope will provide the capacity necessary to keep Italy and Spain from following Greece’s painful path.

“The most important outcome is it seems to remove from the table fears of an imminent bank crisis,” said David Joy, chief market strategist for Ameriprise Financial. “What this does is it buys Europe time to do the hard work of initiating structural reforms.”

But like others, he injected a note of caution: “It addresses the symptoms, but not the disease. They need to follow through, there is no question.”

Economists noted that the deal Thursday was but the latest in a series of such agreements addressing the debt crisis, which are usually followed by gains, then losses in the financial markets.

After the last deal was struck in July, for example, stocks and bonds in Europe and the United States gave it a positive reception. But the sentiment soon turned and markets failed to sustain their gains. The S.&P. in the United States fell below 1,300 after about a week. and eventually sank to its lowest level for the year.

“Overall, then, while the plans represent a step forward, we suspect that they will soon be viewed in the same way as every other policy response during this crisis — as too little, too late,” Jonathan Loynes, an economist with Capital Economics, wrote in a research note.

He said he still expected a “prolonged recession in the euro zone,” further market turbulence, and continued to have doubts about the future of the euro itself “in its current form.”

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 6.1 percent, while the FTSE 100 index in London gained 2.9 percent. In Paris, the main index was up 6.3 percent, while Frankfurt’s was 5.35 percent higher.

Financial shares led European indexes.

The United States 10-year Treasury bond yield rose to 2.37 percent, from 2.21 percent on Wednesday.

The dollar fell against most major currencies. The euro rose to $1.42 from $1.39 late Wednesday in New York, while the British pound rose to $1.61 from $1.5975. The dollar also fell to 75.8 yen from 76.17 yen, and to 0.86 Swiss franc from 0.88 franc.

Anthony Valeri, a fixed income investment strategist for LPL Financial, said that the European deal, to an extent, removed one of the lingering risks to the market and more specifically, to the banking system.

“But the devil is in the details,” he added. “There are some implementation risks going forward.”

He said there were questions about participation in increasing the bailout fund.

“We don’t know the participation from private investors or the emerging market countries, as the case may be,” he said.

Another negative was that banks must meet a new core capital ratio of 9 percent by the middle of 2012, he added. That could mean they could either raise capital or shed assets, which would be a negative for the market because of the pressure on prices.

In Asia, shares were stronger almost across the board. The Tokyo benchmark Nikkei 225 stock average rose 2 percent, the Sydney market index S.&P./ASX 200 rose 2.5 percent, and Hong Kong’s Hang Seng index rose 3.3 percent.

“Bank recapitalization, haircuts and more firepower for the rescue funds are supposed to form a euro-style bazooka,” Carsten Brzeski, an economist with ING in Brussels, said in a research note. “Even if there are still loose ends and unsolved questions, yesterday’s summit was an important step in the right direction.”

Shortly after the deal was announced, United States crude oil futures for December delivery rose 2.8 percent to $92.71 a barrel. Comex gold futures slipped were mostly unchanged, at $1,723.40 an ounce.

Bond market movements showed investors moving out of the securities considered the most secure and into riskier assets.

The Federal Reserve on Thursday is starting a bond buy-back measure that will bump up prices on long-term notes, Mr. Valeri said.

Bond prices for embattled euro zone governments rose sharply, while the yields fell. The yield on Greek 10-year bonds was 22.16 percent, down 1.17 percentage points. Spanish and Italian bond yields also fell.

David Jolly reported from Paris.