The Stock Market Bears Are Back As S&P 500 Fails To Break Through Key 800 Level

After the euphoria, is the market rally over after the S&P 500 (^GSPC) fails to break through the key 800 level? The last two years have taught us that the sometimes sharp and misleading bear market rallies we have witnessed are clustered around Government sponsored event announcements. Drum roll, the next such poorly stage managed show is Geithner’s last stand (see below). Yet more “Buy The Rumour BUT Sell The Fact.”

Today’s Market Moving Stories

• In a populist tabloid headline grabbing measure, the US House passed a controversial, possibly unconstitutional, bill that gives two middle fingers to AIG (AIG), Fannie (FNM), Freddie (FRE) and your other favourite TARP recipients. There is to be a 90% tax on bonuses paid to employees with family incomes above $250,000 at companies that have received at least $5 billion in government bailout money.
• Senior members of Merkel’s team are saying that the ECB has a plan to rescue any member in the Eurozone under difficulty. A leaked report says that the rescue fund could be tapped in 24hrs if necessary. This is a big statement of support for Ireland (which gets specific mention) and any other periphery countries - Austria and Club Med. For Ireland it would mean an increase in the corporation tax level if it wanted to receive, but that’s no great surprise.
• The Fed’s move to turn on the printing presses has led to fears of inflation rearing its ugly head down the road. The US commodities index was up 6% yesterday, as investors bought oil and gold and other commodities. People are buying commodities as a hedge against both inflation and a falling dollar.
• The ECB is under increasing pressure to cut rates and adopt quantitative easing. EUR hit its highest trade weighted level this year, and EURUSD to $1.37. Last week’s Swiss franc devaluation also raised concerns about competitive devaluations. The ECB has so far resisted calls for quantitative easing (QE); maintaining that it was more important to support banks directly. There are also practical complications that the ECB would face due to its supra-national structure. That said the ECB can’t escape the race to the bottom.
• A quick glance at the front pages of the gloomy German press this morning and one can’t help but opine that jobs cuts are beginning to hurt in Germany. FT Deutschland leads with the story that ThyssenKrupp will cut 3000 permanent jobs. As the fall in German manufacturing output is increasingly perceived as being permanent, companies are expected to reduce production and staffing as the crisis continues. Recall that unemployment is of course the ultimate lagging indicator. The paper says in a separate front page article that the German government, privately, expects the economy to contract by 5% this year. This is not yet reflected in the official forecasts.

Geithner Set To Fail The Doorstep Challenge

If we are to believe the press, Tim Geithner, in his last act as US Treasury Secretary, is about to flesh out the details of the public-private “partnership” fund. These details, if and when they arrive, may not be convincing. Back in February, Geithner was strong on rhetoric, aiming for the “largest benefit at the least cost to the taxpayer”. Let’s see. The major difficulty is how to attract private capital, without the taxpayer paying out too much and without marking down bank holdings too heavily. The public seems to be in no mood for capitalists to get an above-normal profit, whatever risks they take. And the government is only making it worse, by hitting on bonuses and investors. So the Administration’s task seems Herculean.

Equities

• Barclays (BCS) is on the slide on a Guardian story that it may have made £1bn through tax avoidance. Not good PR.
• Credit Suisse (CS) has put out a sell note on Deutsche Telecom.
• Cell phone makers Nokia and Ericsson are also notable drags on the major European bourses this morning after a profit warning from Sony Ericsson Mobile Communications.
• FedEx (FDX) posted a 75% drop in Q3 income missing estimates and casting a shadow over the broader economy.
• Oracle (ORCL) beat the Street and offered its shareholders a dividend for the first time.
• Nike (NKE) issued what amounted to a profit warning saying that its future orders for spring merchandise fell by 10%. Nike sells its mechandise to retailers in advance, so a decline in such sales can speak more about the company’s bottom line in the spring than for the current quarter.
• Johnson and Johnson (JNJ) is the subject of a health probe by Shanghai’s Food and Drug Administration, which is investigating claims that chemicals used in some of the firm’s baby products are carcinogenic. J&J has denied the claim, explaining the chemicals in question are used only in trace amounts considered safe by the U.S. Food and Drug Administration.
• Following a High Court ruling, Kerry is to proceed with the purchase of the consumer foods business Breeo for a consideration of €140m (reduced from a prior amount of €165m). The Breeo assets include the Dairygold, Galtee, Shaws, Roscrea, Mitchelstown, Calvita and Sno brands in addition to a chilled foods distribution service. These, in an Irish context, are a powerful range of brands and augment the capabilities within Kerry’s original business and those acquired as part of the Golden Vale takeover in 2001.
• Confirmation that the Irish government is actively looking at forming a bad bank to hold risky financial debt gave Bank of Ireland a 14.65% gain yesterday. But Credit Suisse cut their target price on the bank to €0.27.

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