“Earnings” Impress But Where Are The Revenues

Stocks are now up 8% in just six sessions trading. Wow that better than expected earnings play is getting crowded as the market gets very complacent. Take Caterpillar’s (CAT) price performance yesterday, up 7.7%, after a very frank and bearish conference call and a $1 billion miss on the revenues side. Note that Coke (KO), DuPont (DD) and United Technologies (UTX) also missed their revenue estimates by a country mile. Companies can only cut costs so far and it’s looking like they have been pared to the bone in this quarter, something U.S. companies excel at. Traders will need to see some top line revenue growth for this move to be sustainable.

Today’s Market Moving Stories

• Thank you for flying Fed airways. Fed Chairman Bernanke’s testimony before a congressional committee yesterday was that the plane has safely landed, avoiding catastrophe, but that we should be prepared for a lengthy taxi before we can really think about the exit door being opened. In most respects, it was a well-worn message, and one that has neither provided the impetus for any extension of the improvement in risk appetite nor undermined it.
• China hopes the U.S. will conduct fiscal and monetary policy responsibly and will gradually reduce its budget deficit, Assistant Minister of Finance Zhu Guangyao said. Zhu also hopes that Washington would ensure that the dollar remained basically stable and thus help protect China’s extensive investments in dollar assets.
• The Chinese economy is unlikely to double-dip in the second half as export growth will pick up even as the impact of stimulus spending weakens, said Zhang Yongjun, a researcher at the State Information Centre. China’s exports would fall less sharply in the fourth quarter of this year and might even turn positive on a year-on-year basis towards the end of 2009. He cited improving data in the United States, Japan and Europe, which would increase demand for Chinese goods. The depreciation of the yuan’s effective exchange rate in the last four months, increased export tax rebates and rising export prices would also help to boost shipments, he added.
• The UK’s National Institute for Economic and Social Research (NIESR) provided a pretty bleak assessment of the country’s prospects - this year’s GDP is likely to contract 4.3% and that the rebuild will be so slow that it will be 2013 before growth resumes at any real speed. Recall that the government has above trend growth of 3.5% in its 2011 calculations. The NIESR warned that government plans rely far too heavily on a higher tax intake to offset borrowing, rather than spending cuts. Lower growth equals lower tax intake equals a higher than anticipated borrowing requirement.
• Bank of England (BoE) deputy governor Bean’s tour of the regions continues with more local press comment on quantitative easing (QE). Once again he has stressed that it will take a while before the impact of QE can be fully assessed (recall that in the past he’s said that the lag of QE is probably longer than the nine months or so with conventional interest rates). Following yesterday’s hawkish comment that the BoE would raise rates before taking back QE and would do so should the CPI outlook push above 2%, Bean softened his tone today noting that there were very few signs of economic recovery taking hold at the moment.
• The two biggest pension funds in the US reported record losses to put the entire sector in the spotlight. Calpers said it dropped 23.4% in the fiscal year to June, with the value of its funds down $56bn in the year to $180.9bn. Calstrs said its decline was 25% with its assets down $43bn to $118.8bn. Real estate was worst hit in their portfolios as Calpers dropped 35.8% and Calstrs 43%.
• A very interesting graph showing the inverse relationship between the S&P 500 price and the volume of trading.
• A real surprise. Believe it or not, a report has found that’s some banks misused the TARP funds.

China Goes Shopping For More Assets
China has owned up to what in reality its been doing for a while on the quiet i.e. “Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies”, said Wen Jiabao, the country’s premier. “We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but this is part of a strategy to reduce its reliance on the US dollar as a reserve currency. “This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis. China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1% stake in Diageo. In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies. “Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

Equities

• The Daily Telegraph is reporting that Barclays (even after selling the family silver) and RBS will have to find billions more capital if they are to continue growing their investment banks under new rules. They quote a report by JP Morgan analyst Carla Antunes da Silva that Barclays may need an additional £12.8bn and RBS £8.5bn more capital.
• Élan yesterday hosted its AGM and despite strong growth in Tysabri and its implications, the main headlines from the meeting centred on CEO Kelly Martin’s comments that J&J may help finance any potential sale of Tysabri by Biogen. It appears that Biogen have the right to approach Élan and request a fair market price for Tysabri. On receipt of such a price, Élan then have the option to either sell its stake in Tysabri or purchase Biogen’s stake.
• Rating agency Fitch cut Irish Life and Permanent’s individual rating to ‘C’ from ‘B/C’ and also cut the rating on the life company to ‘BBB+’ from ‘A-’ to reflect the agency’s concerns regarding the expected profitability in the next two or three years. The Irish Insurance Federation further highlights the pressure on life earnings, reporting a drop of 40% in new life and pensions business for the sector in H1 of this year. Within this, single premium sales fell 67%, while regular premium pension’s sales were down 44%.
• While Ryanair doesn’t report until July 27th it announced that a reduction of 16 aircraft at its Standsted hub as it said it was unhappy with airport charges and taxes. This should help alleviate some of the yield pressures
• Siemens is cutting 1,400 jobs in order to meet profit targets for the year. It’s that now familiar story that if you can’t make the top line bigger, you make the bottom line smaller.
• In an upbeat interview, Audi’s CFO Axel Strotbek predicted a pick up in sales next years for both Audi and Lamorghini luxury cars. Both are owned by VW.
• Sat nav makers Tom Tom are up sharply this morning after reporting profits which beat expectations.

Earnings Today
Another earnings fest today with highlights including Boeing, Glaxo, Morgan Stanley, Pepsi, Pfizer, Wells Fargo, Bank of NY Mellon, Delta, KeyCorp, SunTrust, US Bancorp, Qualcomm, eBay and Sandisk.

And Finally…
You really have to respect rating agencies when they do this kind of thing - Standard & Poor’s raised the ratings on several securities it had downgraded just a week ago!

Here’s how they did it

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