Stocks Drift Lower Amid Summer Doldrums

Yesterday was a classic summer trading day as temperatures in the NY area soared past 90 degrees. But given its recent meteoric rise a very modest 32 point pullback in the Dow amid light profit taking is a respectable performance on a summer Monday in thin volume. The S&P 500 (^GSPC) was trading up a dizzying 48% from its March 9 low and finished the week above 1,000 for the first time since October. The index was trading 15% or more above its key 200-day moving average. That’s getting to levels that tend to attract selling. The surprise is that there wasn’t more follow through. Is the last remaining bear on vacation? Speaking of the endangered species I’ve noticed a fresh plethora of articles over the last 36 hours making the case for a return of the grizzly when September comes. As Rosenberg put it in Barron’s, “for the first time ever, it (the market) has rallied nearly 50% amidst a two-million-job slide.” The disconnection between reality and prices is getting too wide methinks.

Today’s Market Moving Stories

• As expected the Bank of Japan kept its interest rates at 0.1% as downside risks persist.
• Plenty of data out of China overnight. Chinese CPI fell by more than expected, down 1.8% over the past year. The PPI was down by 8%. Deflation should persist through year-end. Industrial production figures showed that annual growth was largely unchanged at 10.8%, suggesting that the impetus from restocking is fading even as fixed investment was modestly slower. New loans increased by CNY356b, which was less than expected. This suggests that the argument for tightening is less compelling. The annual growth of retail sales remained broadly steady at 15%. Finally the trade balance suggested that exports are picking up, rising 5% in July to be over 10% above this year’s low. So net, the Chinese data was a shade weaker than expected.
• Media reports today suggest that the UK Government and investors are greeting plans for Lloyds plans for a £15-20 billion rights issue with skepticism. There is a belief that given the blueprint already put in place for a banking revival through the asset protection scheme, the Treasury would not be keen on banks raising equity to sidestep the scheme. This is contrast to the US initiatives, where banks have been actively encouraged to raise equity to pay down government investment.
• From the UK a relatively positive set of housing/consumer data sitting well with the view that the Bank of England will signal it has committed to enough stimulus for now in tomorrow’s Inflation Report.
• The UK RICS survey continued its recent positive run, improving from -17.6 to -8.1, somewhat firmer than the -10 consensus and representing a two year high for the series. The sales to stock ratio, a key lead indicator of house price inflation, also continued its recent upward march, rising from 20.1 to 22.5, a 15 month high and close to the 25 or so level consistent with flat house price inflation. A lack of supply, however, is serving to buoy this survey as highlighted by the marked disconnect between new enquiries and new instructions.
• The UK BRC reported total sales rising 3.6% yoy (up from 3.2%) despite it being the wettest July on record. Like for like sale quickened from 1.4% to 1.8%.
• In contrast a real-estate data service Zillow.com reported that 25% of US home owners now have bigger mortgages than the value of their home with that figure set to rise to 30% by mid-2010.
• For what it’s worth Bank of America’s chief US Equity Strategist David Bianco has just come out with a bullish piece on the S&P 500. The main highlights of the piece are that he is looking for: (1) 2009 EPS to come in at $59, (2) 2010 EPS to come in at $69 (17% growth), (3) at 1,000, or 14x normalized EPS, he advises “strategic accumulation” of S&P 500 stocks.
• Mark Mobius said global stocks will drop as much as 30% following their recovery from last year’s rout as companies take advantage of the rebound to sell more shares. Note Mobius is a bit of a perma bull so I think this is worth a close read. All of this may fall on deaf ears in the context of the past few weeks of zealous risk acquisition, but I think this economic reality theme will ultimately reverse risk appetite.
• The Baltic Dry Index, which tracks shipping costs and is viewed as leading indicator for commodity prices, has had its worst week since the peak of the financial crisis last October, as Chinese demand slowed.
• Ten reasons to beware the Bear.

Equities
Smurfit Kappa reports Q2 results tomorrow with market estimates calling for EBITDA of €176m, a decline of 32% year-on-year. Recent comments from industry peers point to a continuation of the difficult operating environment in the European packaging sector. Excess capacity remains an issue despite downtime and permanent closures being announced across the sector. The introduction of new capacity by peers such as Mondi in the second half will serve to further undermine efforts to rebalance an already weak supply demand equation.

NIB parent Danske’s Q2 looks nasty DKK828m loss vs expected DKK300m consensus profit. H1 is still in the black with a net profit of DKK725m. Not only has Danske seen continued elevated spike in loan losses but more worryingly the revenue also net interest income has taken a battering and trading gains were 40% down on Q1. Divisionally, Ireland has been a massive underperformer, purely on loan losses which were up to DKK2.8bn in H109 from DKK189m in H1 08.

Data Ahead Today
From the US, non farm productivity, unit labour costs, wholesale inventories and the first day of FOMC meeting.

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