The MissionIR Report - Mid-July 2012
In-depth analysis, timely updates, latest market news
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Euro Turns Up from 2-Year LowThe euro turned up sharply on Friday, which analysts attributed to a big shift in traders betting against the currency after it touched technical levels near the lowest in two years. Earlier, the U.S. dollar gained ground after a report showed U.S. wholesale prices unexpectedly rose last month, frustrating hopes that central bankers can ease policy further. Still, the euro remained near a two-year low after Moody's Investors Service cut Italy's government bond ratings by two notches and the country's Treasury sold new three-year bonds. The sampled EURUSD +0.27% fell as low as $1.2161, before rebounding to $1.2232, up from $1.2197 in North American trade late Thursday. For the week, it's still down 0.5%, having fallen for the past seven sessions, according to FactSet. The dollar index, which measures the greenback's performance against a basket of major currencies, turned down to 83.395, from 83.666 Thursday. The move in the euro erased the index's gain for the week, which was already weighed by a decline versus the Japanese yen. Traders who are short the euro sometimes have to reverse those bets as certain levels are hit, analysts said. "It looks to be a technically driven move," said Eric Viloria, senior currency strategist at Forex.com. European bonds are performing better, "equities are higher, and U.S. yields are higher, which all correlates to a higher euro-dollar." The Dow Jones Industrial Index jumped 1.3%, after falling for the prior six sessions — its longest losing streak since May. Analysts also noted that Goldman Sachs analysts, led by Thomas Stolper, said in a note Friday that they were sticking with their 12-month forecast for the euro to rise to $1.40 – quite a far cry from the $1.20 or so that many others see being reached over a much shorter horizon. Even Goldman itself lowered its three-month forecast to $1.25, from $1.33 previously, according to Dow Jones Newswires. Goldman saying the euro's 12-month forecast was part of what triggered the euro's gains, said Dean Popplewell, chief currency strategist at trading platform Oanda. Earlier, the dollar rose after the U.S. Labor Department said its Producer Price Index rose 0.1% in June, while analysts had expected a decline of as much as 0.5%. Excluding food and energy, prices rose 0.2%, in line with forecasts. In recent days, the dollar has gained ground as hopes (by investors in riskier assets like stocks and commodities) have faded that the Federal Reserve may launch a third round of quantitative easing. That kind of policy typically involves buying assets to pump money into the financial system, and is seen by many as devaluing a currency. Global Stocks Up as China Growth SlowsGlobal stock markets were higher Friday after China said its economy grew in the second quarter at its slowest pace since 2009, numbers in line with analyst expectations. In early trading in Europe, Britain's FTSE 100 was up 0.4 percent at 5,633.02. France's CAC-40 gained 0.2 percent to 3,140.46, while Germany's DAX advanced 0.5 percent to 6,449.15. China's gross domestic product expanded 7.6 percent in the April to June period from the same period a year earlier, down from 8.1 percent growth in the first quarter. China also reported that retail sales and factory output growth slowed in June. Equities in Asia had mostly fallen the previous few days amid speculation that China's growth may have slowed more than the consensus 7.6 percent forecast. Some analysts say expected interest rate cuts and fiscal stimulus spending by China should spur lending, investment and stronger economic growth in the second half of the year. "All this should be positive for GDP growth in the next few quarters," said Mark Williams, chief Asian economist with Capital Economics. "Much of the impact of stronger lending over the next few months will be felt in 2013." Williams said he expects China's economy to grow 8 percent this year and next. Japan's Nikkei 225 index was up 0.1 percent to 8,724.11 while Hong Kong's Hang Seng rose 0.4 percent at 19,094.40. South Korea's Kospi gained 1.5 percent to 1,812.89. Australia's S&P/ASX 200 advanced 0.4 percent to 4,082.20 and China's Shanghai Composite was steady at 2,185.90. Other analysts expect Chinese growth to continue to slow as consumer demand fails to keep up with industrial production capacity. China's GDP will likely average about 6 percent growth a year during the next five to 10 years, said Anil Gupta, a professor at the Smith School of Business at the University of Maryland. "The days of 8 percent GDP growth in China are over," said Gupta, who is a visiting professor at the INSEAD business school in Singapore. "There is massive overcapacity in a lot of industries such as cement, steel and autos because the government kept providing cheap capital and everybody assumed that the 8 plus percent growth rate will go on forever." On Thursday, the Dow Jones industrial average closed down 0.3 percent at 12,573.27. The Standard & Poor's 500 fell 0.5 percent at 1,334.76. The Nasdaq composite was down 0.8 percent at 2,866.19. Benchmark oil for August delivery was up 35 cents at $86.43 a barrel in electronic trading on the New York Mercantile Exchange. Crude rose 27 cents to settle at $86.08 on Thursday in New York. In currencies, the euro was little changed at $1.2199 from $1.2195 late Thursday in New York. The dollar was steady at 79.27 yen from 79.31 yen. JPMorgan's Bad Trade has Ballooned to $5.8BJPMorgan Chase said Friday that a bad trade had cost the bank $5.8 billion this year, almost triple its original estimate, and raised the prospect that traders had improperly tried to conceal the blunder. "This has shaken our company to the core," CEO Jamie Dimon said. The bank said managers tied to the bad trade had been dismissed without severance pay and that it planned to revoke two years' worth of pay from each of those executives. JPMorgan said it had lost $4.4 billion because of the trade from April through June, and its chief financial officer said the bank had lost an additional $1.4 billion in the first three months of the year. Dimon's original estimate of the loss from the bad trade, disclosed in a surprise conference call with Wall Street analysts in May, was $2 billion. On Friday, Dimon said he believed the loss was mostly contained. In the worst case, if financial markets deterioriate severely, the bank could lose an additional $1.7 billion, he said. That would bring the total loss to $7.5 billion. Investors appeared relieved that the mess was mostly behind the bank. They sent JPMorgan's stock price up $1.50, or more than 4 percent, to $35.54. That made it the best-performing stock in the Dow Jones industrial average. The bank said an internal investigation, including emails and voice messages, had called into question the values that traders placed on certain bets, and that the traders may have been seeking to mask losses. Speaking broadly about the trading loss on Friday, Dimon told analysts: "We don't take it lightly." He added: "We're not making light of this error, but we do think it's an isolated event." Dimon said the bank had closed the trading division responsible for the bad trade and moved the remainder of the trading position under its investment banking division. Overall, JPMorgan said it earned $5 billion, or $1.21 per share, for the second quarter, which covers April through June and includes the bank's disclosure of the trading loss on May 10. New York Fed Knew of Libor CheatingAn unidentified employee of U.K. bank Barclays PLC told the New York Federal Reserve Bank more than four years ago that the bank was filing false reports on a key interest rate, according to documents released by the regional central bank on Friday. The documents show that a summary of this admission was quickly circulated throughout the U.S. government, including the Federal Reserve and the Treasury Department, in 2008. The Libor rate is now at the center of a sweeping industry-wide, cross-border investigation into the setting of interbank lending rates. The U.K. bank Barclays PLC was fined roughly $450 million for fixing Libor. Other banks across the world including Citigroup, J.P. Morgan Chase, the Royal Bank of Scotland and Deutsche Bank have said they also are being probed. Morgan Stanley analysts say the Libor scandal hits banks three ways – through fines, like the one Barclays paid; litigation risk; and less certainty on future earnings as regulators and politicians demand Libor and broader industry structure change. In a note published Thursday, they said they expect fines equaling about 9% of 2012 earnings per share and litigation risk of roughly $400 million per bank. Libor is based on rate submissions from a relatively small and select panel of major banks, including Barclays, and is calculated and published daily for several different currencies by the British Bankers' Association. The New York Fed released the documents in response to inquiries from members of Congress about the role of Treasury Secretary Timothy Geithner, then the head of the New York Fed, and its questions about Libor. According to a New York Fed, information that there were problems with Libor started in the fall of 2007, but were mainly anecdotal reports and "mass-distribution emails." In December 2007, Barclays told the New York Fed in a phone call that, in general, Libor submissions appeared unrealistically low. On April 11, 2008, a New York Fed analyst asked a Barclays employee in detail about the extent of problems with Libor. "The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its Libor submissions, relative to other participating banks," the New York Fed statement said. The analyst — Fabiola Ravazzolo, according to one transcript released — reported the comment to senior New York Fed management and the comment was mentioned in a weekly briefing prepared by the New York Fed staff for the Fed Board of Governors in Washington and the Treasury Department. On May 1, Geithner raised the subject of Libor with the President's Working Group on Financial Markets, consisting of the heads of U.S. regulatory agencies. The New York Fed gave a detailed briefing to Treasury officials on May 6. Geithner then approached U.K. regulators with their concerns about Libor. In a June 1, 2008 memo to Bank of England Governor Mervyn King, released by the BOE, Geithner proposed six reforms of Libor, including steps to establish a "credible" reporting procedure and eliminating incentives to misreport. King responded on June 3 that Geithner's recommendations for improvements to the calculation Libor "seem sensible." The emails show that the BOE passed the recommendations on to the British Bankers' Association. In a statement, the BOE said that "no evidence of deliberate wrongdoing had been cited" at the time of the correspondence between King and Geithner. Year-End 1500 for S&P 500?A handful of four primary vectors were drawn up by the chief investment strategist over at Wells Capital Management, Jim Paulsen, in an interview on his 1,500 target for the S&P 500. In an opening salvo against market crisis neuroses, Paulsen pegged Europe as no longer being a crisis in any proper sense. The argument is that Europe is basically a "chronic problem." Europe is a problem that will be with us for decades, but not one that will derail a global recovery Paulsen argues, pointing more to emerging markets like China and India which have seen bad growth metrics recently, and arguing that the biggest substantial risk to markets at this point, especially the S&P 500, would be a recession in the emerging world. However, the caveat here is obviously last Fall's strong, accommodative policy measures (easing, etc. as opposed to the late 2010 rate hikes) and the projection that China's slowdown is already bottoming-out, with a potential nadir being around Q4. The probability curve is pretty clear to Paulsen on such policy initiatives already getting ahead of the problems at some level, ensuring that the growth potential in emerging markets isn't something to be too worried about. So if the Euro fear flare up cycle is largely digestible and emerging markets can pull out of the dive easily enough, the other two major factors from Paulsen's point of view are an under-quantified robustness in the domestic economy coupled with exceptional earnings multiples. Pointing to $100-level trailing 12-month earnings per share estimate for the S&P 500 in a recent research note, that gives us a price-earnings multiple of around 13 times on trailing earnings (year-end consensus-estimated earnings of around 12.3 times), Paulsen confidently characterized it as a cheap buying opportunity. In fact, he characterized Europe as such and argues generally that too much of an internationalism bent exists, where too much focus on external economies in Europe and China for instance, has upset domestic perspectives. Paulsen made a strong case that the initial overstatement of U.S. growth data, followed by a huge failure to adequately state the realities of the problem, effectively short-circuited perceptions to a large extent, and he remains very bullish on the domestic economy. People may be selling the market based on low GDP projections but Paulsen argues the U.S. economy is doing "far better than people think," pointing to his own figure of around 2.5% growth, and underlining several elements that could push it as high as 3%. Stimulating factors cumulatively make this possible according to Paulsen, like mortgage rates under 3.75% (5% last year), money growth at around 10% since Fall (was growing at only 5% a year ago), a dollar that is still off 10% from 2010 highs, falling prices at the pump on fuel, and the recent Case-Shiller 20-city Index (Mar – April period) which shows a 1.3% jump in home prices, breaking a seven-month down trend streak. Also noted was the inflation rate falling from 4% last Fall to 1.7%, which, alongside China being able to buck the down trend and interest rates being so low amid prime earnings multiples, gives credence to the argument that the S&P 500 could rally through March highs of 1,440 in the second half of the year. Paulsen said that the combination of low interest rates/inflation and choice earnings multiples has never been seen before in the post-War era. The component vector is tactile to Paulsen who argues that investors aren't going to care about Europe with a modest domestic recovery and returning emergent growth, with only China's reliance on Europe as an export market raising concerns. Looking for a momentum pickup in emerging markets next year, upward revision of GDP targets, a settling-down of financial fear in the Euro zone, and underscoring the attractiveness of the S&P 500 valuations, Paulsen held fast on his 1,500 target for year-end. |
Cardium Therapeutics, Inc.
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