Markets rise on easing euro debt concerns

Dow added another 45, advancers over decliners better than 3-1 &  NAZ was up 9.  The S&P 500 rose to a new high since the fall of 2008, although Apple (AAPL), which accounts for 5% of the index, is responsible for some of that advance.  The Financial Index is up 2+ to the 2106s, a new high since early May.  The MLP index was flattish at 296 & the REIT index rose 1 to 265.  Junk bond funds were higher (along with stocks) & Treasuries pulled back.  The yield on the 10 year Treasury is up about 45 basis points in the last month.  Oil climbed to a 3-month high on speculation euro-area leaders will make progress in resolving the region’s debt crisis.  Gold rose to its highest level since early May.

AMJ (Alerian MLP Index tracking fund)

Treasury yields:

U.S. 3-month	0.101%
U.S. 2-year	0.287%
U.S. 10-year	1.835%

CLU12.NYM

...Crude Oil Sep 12

...97.25

..... 1.28

(1.3%)

GCU12.CMX

...Gold Sep 12

.....1,639.00

... 18.70

(1.2%)

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Jean-Claude Juncker, Luxembourg's prime minister

Photo:   Bloomberg

The € rose to 6-week highs before regional leaders meet this week to discuss Greece's debt reduction program amid optimism the Euro debt crisis is being contained.  The € appreciated for a 2nd day after Germany indicated concessions for Greece were possible & as Spanish borrowing costs declined at a bill auction.  The dollar weakened against all but one of its 16 major counterparts before a report tomorrow forecast to show US home sales improved last month, reducing demand for safer assets.  The € rose a penny to nearly $1.25, the strongest since Jul 5. 

Euro Advances to Six-Week High on Greece Crisis Optimism

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Photo:   Yahoo

But all is not well in Europe.  After their holidays spent soaking up the Aug sun, Europe's political leaders are bracing themselves for storm clouds this fall.  The latest economic figures show that Europe is edging closer to recession, dragged down by the crippling debt problems.  These debt troubles have tormented the eurozone for close to 3 years & so far have defied leaders' efforts to fix them.  The longer they take to resolve, the bigger they get.  Leaders from France, Germany & Greece meet later on this week in the latest round of shuttle diplomacy to attempt to put a lid on the eurozone's debt crisis.  But 6 eurozone countries, Greece, Spain, Italy, Cyprus, Portugal & Malta, are already in recession & others look feeble.  Europe's stumbling economy is hurting recovery in other parts of the world.  The EU recorded GDP last year of $15.5T, slightly more than the US output.  It is also a major source of sales for the world's leading companies.  Any further economic problems would be felt in order books back in the US & China.  40% of McDonald's (MCD), a Dow stock & Dividend Aristocrat, global revenue comes from Europe, more than in the US.  The company reported a 0.6% slump in meals served in Europe last month.  Ford (F) warned last week that auto industry sales in the region through Jul were the lowest in 17 years.  Euro debt problems are not going away anytime soon.

Europe's leaders face post-holiday blues AP




Photo:   Bloomberg

Best Buy reported a 90% drop in net income during Q2, dragged down by restructuring charges & weak sales. The company also withdrew its earnings guidance for the year.  The company also is halting stock buybacks for fiscal 2013 during the CEO transition (announced yesterday).  EPS was 4¢, sharply below 34¢ last year.  Revenue declined nearly 3% to $10.55B.  Adjusted EPS was 20¢.  Analysts expected EPS of 31¢ on revenue of $10.65B.  Revenue at stores open at least 14 months fell 3.2% for the entire business, including a 1.6% drop in its domestic business & an 8.2% decline in the intl division.  Analysts had expected a 2.6% decline for the total business.  US sales growth in tablets, mobile phones, appliances & e-readers helped offset declines in gaming, digital imaging, televisions & notebook computers.  The intl business was dragged down by lower revenue in China, Canada & increased competition in Europe.  BBY is hoping that Joly, new CEO, can turn around the company & bring stability that has been badly lacking.  BBY has seen annual declines in revenue at stores open at least a year for 2 of the last 3 years.  There is an offer to buy shares for about $25 from its former chairman, but that is iffy to say the least.  The stock fell 54¢ (3%).

Best Buy Suspends Profit Forecast as Net Income Falls

Best Buy (BBY)

The risk appetite by investors is heading north.  Treasuries have been dumped in the last month & that money is being used to buy stocks.  But debt mess problems have not been solved & the euro economy is sagging.  Meanwhile the US economy, while doing better, is not grading a grade of A.  The bulls are praying that Big Ben will utter magical words on Fri so that Dow can record a new 2012 high.  It still needs another 100 & is not being helped by the advance in AAPL stock.

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Markets advance on euro bond buying program

Dow rose 21, advancers over decliners 2-1 & NAZ was up 22.  The Financial Index was up a fraction to 200, an almost 3 month high.  The MLP index rose 2+ to the 392s but the REIT index fell a fraction in the 268s.  Junk bond funds were mixed & Treasuries had modest gains.  Oil advanced to a 2-week high as stocks gained while the German gov backed the ECB’s bond-buying plan, adding to optimism that the region’s debt crisis will ease.  Gold was higher but continues near 1600 where it has been for months.

AMJ (Alerian MLP Index tracking fund)

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Treasuryb yields:

U.S. 3-month	0.076%
U.S. 2-year	0.236%
U.S. 10-year	1.551%

CLU12.NYM

...Crude Oil Sep 12

...92.13

... 0.73

(0.8%)

Photo:   Bloomberg

When ECB President Draghi vowed on Jul 26 to do “whatever it takes” to defend the €, he succeeded in stemming a slide that pushed the currency down 6% since late Mar. Traders in the options market responded by raising bets against the currency by the most in 11 weeks.  Options to protect against further weakness climbed in the past 2 weeks by the biggest amount since May.  Between Jan 12, 2011, when German Chancellor Merkel vowed to do “whatever is needed to support the euro” & Draghi’s almost-identical pledge, Portugal, Spain & Cyprus sought bailouts & the region’s $13T economy teetered on recession.  Growth will trail its peers thru at least 2014 as numerous are cutting their outlooks.  While traders aren’t anticipating a failure of the common currency, the €’s depreciation shows investors see better opportunities almost anywhere else in the world.

Draghi Echoing Merkel Has Trader Raise Bets Against Euro

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Photo:   Yahoo

Best Buy's co-founder is offering to take the electronics seller private, only months after leaving as the company's chairman.  BBY will consider the offer but called it "highly conditional."  Many are skeptical that former Chairman Richard Schulze's opening offer of $24-$26 per share would get a deal done.  It could be tricky to line up investment firms to pay for it.  Over the past year, it has announced a major restructuring plan as BBY is trying to avoid the fate of its rival Circuit City, which went bankrupt in 2009.  The offer values the company at as much as $8.8B (Schulze already has 20%).  The offer would represent a 36-47% premium over the Fri close.  Schulze said he would have preferred to pursue a deal privately but went public with the offer for the sake of speed.  The stock gained $2.35 to $19.99 but is still about $5 below its potential worth because of doubts on getting the deal done.

Best Buy’s Founder Schulze Offers to Buy Retailer for Up to $26 Per Share

Best Buy (BBY)

Photo:   Bloomberg

US banks are relaxing their terms on credit cards & lending for autos & commercial real estate, according to a Federal Reserve (FED) survey.  "Domestic banks, on balance, continued to report having eased their lending standards across most loan types over the past three months," the FED said in its quarterly survey of senior loan officers.  While lending standards are tightening at branches of foreign banks, "domestic banks reported that their business had increased due to decreased competition from European banks and that they remain willing to accommodate additional such business," the Fed said.  Banks are lending the most since the recession ended in Jun 2009, supporting an economy burdened by 8.3% unemployment.  The survey said that banks loosened standards for loans to large & medium-sized firms, while loan standards to small business were little changed for the 4th consecutive survey.  Banks that eased standards on business loans "continued to cite more aggressive competition from other banks and nonbank lenders as a reason.  Only about a fourth of banks that had eased lending policies had done so because of a more favorable or less uncertain economic outlook."  Demand increased for commercial real estate loans according to a "relatively large" number of survey respondents & standards for such loans were more likely to be eased than tightened.  Consumer lending standards for car financing & credit card loans eased, while standards for other consumer borrowing were about unchanged.  A "relatively large" number of loan officers reported stronger demand for prime mortgages during the survey period, while lending standards for those home loans were little changed although standards "tightened somewhat for nontraditional mortgages."

Fed Says Banks Ease Standards on Business, Consumer Loans


Markets were sloshing around trying to figure out where to go.  But the bulls have the upper hand after the strong gain on Fri.  The biggest drive behind the rise was an absence of bad news out of Europe, but there is plenty of it under the surface.  The Dow went over 13.1K & is looking to top the 13.4K high reached over 3 months ago.  Markets are still vulnerable as Dow fell 50 in the last half hour, limiting the daily gain.

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Mixed markets on continued Euro worries

The stock market started lower & remained under water all day.  Buyers came in after lunch but that did not last,  Dow ended down 17, decliners over advancers 4-3 but NAZ added 12.  Bank stocks led the sell, taking the Financial Index down 1+ to the 179s (36 below its yearly highs in late Mar.)

The MLP index lost another 5+ to 352 (down 37 YTD) & the REIT index fell 1+ to a little above 240.  Junk bond funds were lower & Treasuries fell for the first time in 4 days on speculation the US economy won’t slow enough to justify keeping yields at the record lows.  Oil rose for the first time in 5 days as the € advanced after European leaders agreed to discuss closer banking cooperation among the nations that use the €.  Gold is holding above $1600, an improvement over recent weeks.

JPMorgan Chase Capital XVI (AMJ)

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Treasury yields:

U.S. 3-month	0.066%
U.S. 2-year	0.250%
U.S. 10-year	1.526%

CLN12.NYM

...Crude Oil Jul 12

...83.91

... 0.68

(0.8%)

Photo:   Bloomberg

On Fri General Motors said it will offer lump sums to 42K white-collar retirees if they stop taking monthly pension checks.  For the rest of its 118K US salaried retirees & spouses, GM will buy a group annuity that will make monthly payments starting in 2013, to unload $26B in liabilities.  But GM plans to pump $3.5-$4.5B into the pension fund & then pay $29B to buy the annuity from Prudential (PRU).  Retirees will get their monthly checks from PRU starting next year.  Implications for GM stock are unclear but the shift will cut the US salaried pension obligation from $36B to around $10B.  Globally, GM had pension obligations of $134B with only $109B available to pay them.  One analyst said that the new pension plan frees GM from the volatility of pension investment returns, long-term interest rates & mortality rates of retirees - but at a cost. The underfunded pension liability will still be very large, at about $24B. The stock dropped 90¢ & has an ugly chart even though its business is strong.

GM Cutting Pension Obligations by $26 Billion on Buyouts

General Motors Company (GM)

Chancellor Merkel just said creating a European banking union can be a medium-term goal because the continent has to deepen its political integration.  This came ahead of private talks with EU Commission President Barroso to discuss how systemically important banks could be put under the supervision of a Europe-wide authority.  The proposal was floated by the EU Commission last week & would comprise a Europe-wide deposit guarantee aimed at calming jittery markets.  But rich countries such as Germany were initially lukewarm about it because of fears it could lead to them bailing out other countries' banks.  Merkel said the eurozone "needs more Europe, not less" but initiatives like a banking union can only be "medium-term goals" & not quick fixes to the debt crisis.  This is more of make it up as we go along.

Merkel embraces idea of European banking union AP

Photo:   Bloomberg

The € rose for a 2nd day as traders said the shared currency’s decline may have been too quick after European leaders agreed to discuss closer banking cooperation in the euro zone. The currency gained from a more than 11-year low against the ¥ amid speculation that traders were unwinding bets the currency would decline.  The € rose 0.5% to $1.249, a penny above its low on Fri, the weakest level since Jul 1, 2010.  The 14-day relative strength index for the € versus the dollar rose above 30 for the first time in 9-days, ending the longest streak since 2008.  There is a feeling that its decline has been too fast.  A longer term view shows it near its lowest levels in the last 8 years, hardly an endorsement about solving the Euro debt mess.

Euro Gains for 2nd Day on Optimism Leaders Near Solution


There is a lot of talk coming out of Europe, but the truth is that nobody knows what to do.  It has a whopper size mess.  The debt crisis seems like it will go on for months & the recession, especially severe in countries that need the most help, makes matters worse.  Weak economies in Europe are affecting companies around the world.  I have a feeling that Big Ben will try to pull a rabbit out of his hat, hoping that another bond buying program will give the economy a jump start.  I'm not optimistic.  Dow is back to where it was in Nov & fighting to remain above 12K.  That test could come very soon (i.e. this week).

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