Markets Live chat transcript for the chat ending at 16:05 on 11 Mar 2011. Participants in this chat were: Cardiff Garcia John McDermott Douglas Cliggott
CG
Goooood morning from New York
JM
Good afternoon London
CG
Welcoem to US Markets Live
JM
(Hello Omaha, Brooklyn,DC etc etc, Toronto)
JM
Brought to you by a Cuban with a Welsh name and a Scot with an Irish name
CG
Come at you from the Free World
JM
With the best American remake of a British classic since Mark Walhberg’s The Italian Job
CG
um… The Office? Bah
JM
And a show as packed as Saif Gaddafi’s house
CG
context?
CG
Nice gaff
JM
So here’s how it’s going to work
JM
You know UK Markets Live
You heart UK Markets Live
You heart UK Markets Live
JM
But London is a small place and it’s a big world out there
CG
The FTSE is really just a commodities cornershop anyways
JM
So we’re going to leave what happens there to the experts
JM
and to Neil and Bryce
JM
(Also because we have no knowledge of UK companies)
CG
Do we have knowledge of US companies?
JM
Oy, don’t answer that
CG
And trot through the big macro and company news from around the world every Friday
JM
Breaking news when we can — and giving you a sharpish round-up of what’s happened this week
CG
Or at least how it pertains to the only country that matters: America
CG
F*** yeah
CG
We kid. (And we can: everybody in London is half iin the bag right now)
JM
So let’s get going and introduce a real expert who is helping us out in this first show
JM
Doug Cliggott, Credit Suisse’s chief U.S. Equity Strategist
JM
He’ll be giving us his thoughts as we try and rattle through what’s happening on this quiet day
JM
Japan
the ME and oil
the eurozone
the ME and oil
the eurozone
CG
Oof, on a day like this, retail sales and other macro indicators are tame by comparison
CG
Doug will also take questions, some we have from you already, but do ask away in the comments
CG
Easy
CG
This week’s banned words: “gold” and “Charlie Sheen”
CG
as in, if you say
CG
“US ML is overhyped like a Charlie Sheen bender”, you get a yellow card
CG
Anyways, you up for it, Doug? Take a bow
DC
Good morning NY!
JM
Be nice all
CG
Yep, should we go around the horn quickly then?
JM
go
CG
S&P now at 1292
CG
JPY at 82 and change
CG
EUR holding at 1.3815
CG
Brent for April at 1.13
CG
Rabble, what are we missing?
JM
Up to 300 bodies found in Sendai city, domestic news agency Jiji says.
JM
Tsunami warnings issued for the entire Pacific basin except the mainland United States and Canada
JM
(All from Reuters)
JM
In Oil
JM
Maruzen shuts two naphtha crackers at Chiba with capacities of 480,000 and 690,000 tonnes of ethylene per year, respectively.
JM
Kyokuto Petroleum says shuts 175,000 bpd Chiba refinery after quake, will not reopen until tomorrow at earliest.
JM
Major explosion hits petrochemical complex in northeast Japan’s Miyagi prefecture, Kyodo news agency says.
JM
Friday, March 11, 2011 10:10:23 AM RTRS – GARTMAN SAYS THE AMOUNT OF MONEY THAT HAS TO BE REPATRIATED TO JAPAN IS “ENORMOUS” .DXYJPY=
JM
So, Doug… initial reactions to how the quake in Japan will affect the US?
DC
yen should strengthen
DC
may be some disruptions in autos and electronics
DC
may see increased demand for fossil fuels if nuclear outages last …
DC
may see some selling of Treasuries if funds needed are huge
JM
yields up a smidgen
CG
3.37 on 10yr last i checked
DC
yoelds are up a little today to 3.37 on 10 yr
CG
John, how about a few other analyst reax to complement doug?
JM
Interesting breaking news from Gartman
JM
If we can call it that….
JM
Today 10:09 – INVESTOR DENNIS GARTMAN SEES DOLLAR/YEN JPY= HEADED TO 75 IN A MATTER OF DAYS OR WEEKS
JM
And some thoughts on how Japan govt might respond
JM
In a bind already of course
JM
Divyang Shang of IFR
The BoJ during 2004 was willing to leave intervention funds in the market and matching this with an expansion of QE. It is too early to say whether the G7 would be willing to lend a helping hand to Japan and conduct co-ordinated intervention but this is a scenario that is worth not dismissing outright. At the very least we would look to play increased volatility on USD/JPY given the low vols and it might be worth holding 2mth vol and selling out in 1mth time should vols fail to rise.
The BoJ during 2004 was willing to leave intervention funds in the market and matching this with an expansion of QE. It is too early to say whether the G7 would be willing to lend a helping hand to Japan and conduct co-ordinated intervention but this is a scenario that is worth not dismissing outright. At the very least we would look to play increased volatility on USD/JPY given the low vols and it might be worth holding 2mth vol and selling out in 1mth time should vols fail to rise.
JM
Gavin Friend at the National Bank of Australia
But in the slightly bigger picture we cannot see any option other than the Japanese government going all out to aid economic recovery. This will involve issuing more debt (and worry about paying for it later rather than selling USTs at current USD/JPY levels to finance it) with the BoJ possibly doing more QE. Note Monday’s two-day meeting will now be a one-day event.
CG
Here’s one that agree with Doug about the yen, from viincent tsui at standard chartered in hong kong
CG
We see a sharp correction in the yen and the BOJ might maintain its dovish policy stance at a meeting next week. At a time when the global oil price surge has hit the global economic recovery outlook on which Japan is heavily dependent on, this development will influence them to maintain a dovish stance on policy.”
CG
Any thoughts on insurers, catastrophe bonds, etc…?
JM
Getting hammered on the FTSE
JM
But they’re saying it’s no big deal
JM
That’s the biggest earthquake in Japan’s history — no big deal
JM
Friday, March 11, 2011 10:10:23 AM RTRS – GARTMAN SAYS THE AMOUNT OF MONEY THAT HAS TO BE REPATRIATED TO JAPAN IS “ENORMOUS” .DXYJPY=
DC
Not much re-insurance market cap in the US … mainly the Bermuda insurers
JM
Friday, March 11, 2011 10:12:58 AM RTRS – MUNICH RE MUVGn.DE CEO SAYS JAPAN REINSURANCE MARKET WAS ALREADY HARDENING BEFORE THE EARTHQUAKEMUVGn.DE
JM
(Apols for fat finger above)
JM
From NH
JM
Catlin and Amlin being hit hard, so to some of the European reinsurers.
DC
FTSE is down 44 bps
DC
S&P 500 is flat
CG
Okay then, I think it’s time for Doug to take some questions
JM
We’ll keep watching what’s going on in Japan
CG
A lot of people asking about oil and US equities
CG
So let’s start with a brief history lesson from Doug’s research note out yesterday (and soon to be posted to the long room)
CG
Oil prices have climbed more than 40% above their three-year average twice in the past ten years. The first time was in the summer of 2004, and then it happened again in October 2007. In the first period of elevated oil and gasoline prices — from the end of July 2004 through the end of August 2006 – the US equity market performed well (see Exhibit 3). The S&P 500 generated a 10% average annual return during this 25 month period. In terms of relative performance, the clear winners were energy stocks and electric utility stocks. The losers were consumer discretionary stocks and technology stocks.
CG
The second period of elevated oil and gasoline prices lasted about ten months – from the end of October 2007 until the beginning of September 2008. The US equity market did not perform well in this time period – the S&P 500 declined at about a 20% annual rate. Consumer staples were the only stocks to generate a positive return during this period. And interestingly, energy stocks performed quite poorly in this period.
CG
Why the difference? We think solid (1.5-to-2.0%) growth in US payroll employment and a strong improvement in corporate profit margins were the main reasons rapidly rising oil and gasoline prices didn’t cause either the US economy or the US equity market to break down in 2004 – 2006. But it is noteworthy that consumer discretionary stocks dramatically underperformed the market then — even in an environment of solid employment growth and rising home prices.
CG
When the second wave of higher oil prices hit in late 2007, employment growth had slowed to less than a 1.0% annual rate, home prices were falling, and profit margins were on there way down. The US economy and the US equity market proved to be far less resilient in the face of rapidly rising oil prices in late 2007, and both broke down.
CG
Digest that for a minute while Doug gets ready to add some thoughts. Doug, take it away
DC
Where we are now on Brent — about 112, 113 — we think it is a negative for consumer discretionary stocks in the US … but not yet a real shock to the broad US economy
DC
Our though is now that we are about 40% north of what folks think of as normal prices — we peg that at $80 — behavior is starting to change … but it is not huge yet
DC
most exposed sectos are autos, auto parts and some retail segments
DC
look for mix shift in us auto fleet if crude prices stay high
DC
real risk to US equites is when Fed ends their large scale asset purchases
JM
not if?
JM
JM
DC
that will put negative pressure on P/E multiples
DC
We think it is when, not if … they can not buy $20 billion in assets a week forever, can they?
CG
To that end, here’s what NY Fed chief William Dudley said today
CG
Warning: long excerpts coming
CG
Nevertheless, we always need to be careful about inflation—even in an environment of ample spare capacity. Let me focus on one issue, commodity prices, for a moment. Surely some of the businesses in the audience have faced the challenge of sharply rising oil, food or metal prices in recent months. For example, the spot GSCI—a broad measure of commodity prices—has risen more than 35 percent over the past year. This was in train before the upheavals in the Middle East and Africa raised market concerns about potential disruption to oil supplies, pushing energy prices—though not other commodity prices—still higher. Commodity price pressures are pushing measures of headline inflation above measures of core inflation, which, as I mentioned, exclude food and energy prices. You may have concerns that the rise in commodity prices will turn out to be persistent and, if so, how this might impact the inflation outlook.
CG
From a policymaking standpoint, there are important factors that suggest that it would be unwise for the Federal Reserve to over-react to recent commodity price pressures by raising interest rates soon. Why? First, despite the general uptrend, some of the recent commodity price pressures are likely to be temporary—due to poor weather or geopolitical uncertainties. This is certainly what is anticipated by market participants.
CG
Second, even if commodity price pressures were to prove persistent, they have a smaller impact in the United States than they do in many other countries. Relative to most other major economies, the U.S. inflation rate is lower, the amount of slack much greater and commodities represent a relatively small share of our consumption basket. This small share helps to explain why the “pass-through” of commodity prices into core measures of inflation has been very low in the United States for several decades.
CG
Third, the Federal Reserve’s success in anchoring inflation expectations has also been important in limiting pass-through. Since 1984, for example, when the Federal Reserve began to achieve success in driving down and then subsequently anchoring long-term inflation expectations, there has been very little evidence of commodity price pass-through into core inflation. In contrast, prior to 1984, when inflation expectations were much less well-anchored, pass-through did occur and, at times, played an important role in pushing underlying inflation higher.
CG
and…
CG
Thus, while rising commodity prices may be giving some of you a bad headache, they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate. We will have to ensure, however, that these pressures do not cause inflation expectations to become unanchored. If that were to occur, that would be a troublesome development that would complicate the pursuit of our dual mandate of high employment and low and stable inflation Because we have an Federal Open Market Committee meeting next Tuesday, I will not comment today on the implications of the economic outlook for monetary policy.
CG
done.
CG
While we do this, John’s gonna post some Day of mild anger stuff over on the right
CG
Doug, response?
DC
Our thought on this is pretty simple … we think a fair amount of the electronic cash the Fed is buying bonds with is finding its way into not just stocks but also commodities like oil and grains …
DC
Once they buty the bonds, it is tough for them to control where the “new” money moves …
CG
Doug, gonna post from your prior note on this, if that’s cool
JM
Phew: Friday, March 11, 2011 10:39:23 AM RTRS – FIRE AT TOHOKU ELEC 9506.T ONAGAWA NUCLEAR PLANT EXTINGUISHED, NO RADIATION PROBLEM -KYODO9506.T
DC
Cool … thanks
CG
If we are right, and the Federal Reserve does in fact stop its large scale asset purchases this summer, we think we will see weaker overall stock price performance in the United States as P/E multiples come down. We think lower beta areas of the market will hold up relatively well as price momentum trades are unwound. We would expect to see very large cap equities {the S&P 100} outperform small {S&P 600} and mid-cap {S&P 400} indices as investors are nudged towards lower risk and higher quality securities.
CG
The two S&P 500 sectors that appear to be most at risk in the environment we see ahead are basic materials and consumer discretionary. Many basic materials stocks are already experiencing headwinds from a tightening of financial conditions in China, Brazil and India. A less lush liquidity environment here in the United States would only add to those headwinds. And consumer discretionary is the classic early cycle sector. Many stocks in the sector have had a fantastic two year run and now represent – in our view – unattractive risk/return profiles. …
CG
On profit margins, we think a key relationship to watch is the growth rate of private sector compensation {a proxy for labor costs} versus the growth rate of personal consumption expenditure {a proxy for revenues}. These growth rates converged at the end of 2010. The last time compensation grew faster than consumer spending was in 2006 — that was a good signal of a peak in profit margins.
CG
So, consumer discretionary and basic materials are, you think, the big losers in this mix?
DC
The thought behind our underweight on basic materials is what we see happening outside the US — central banks in China, India, Brazi, Indonesia, etc tightening policy to slow growth down and dampen inflation pressures
DC
US basic materials stocks embed very strong growth outside the US … we think there is big risk in those assumptions
JM
Friday, March 11, 2011 10:40:32 AM RTRS – CLINTON SAYS US AIR FORCE DELIVERED COOLANT TO QUAKE-AFFECTED JAPANESE NUCLEAR PLANT
JM
(Just another example of the US saving the world)
DC
Consumer discretionary has a few issues vene before the run-up in oil & gasoline prices
DC
The most crowded longs in the US market place
DC
Very expensive
CG
Reformed Broker has a point here: S&P materials already off 4.5% this week. Doug, thoughts?
DC
Fair … materials are off this week and behind for the year … our view is we are early in their underperformance.
DC
We believe earnings growth expectations have a long way to move … down
CG
Hang on, John’s telling he’s just come across more commentary on insurers. John, hit us
JM
From Citi
JM
MET, PRU, AFL and MFC have the largest Japanese businesses — Given both its distance from Tokyo as well as its underwater epicenter, we would not expect this very unfortunate disaster to impact to any of our companies materially.
JM
mongst our coverage universe, the four companies with meaningful operations in Japan are MetLife, Prudential Financial, Aflac and Manulife Financial. As a percentage of their total earnings we estimate that country accounts for approximately: 20%; 42%; 70% and 22%, respectively
JM
note the 70% there
CG
Aflac, yeesh
JM
And they add, appropriately
JM
Of far more importance, any loss of life is terrible and this certainly might have been much higher had this tragedy been centered on the Japanese mainland within a more urban area.
CG
Thanks for that, just before we close, how about a look at consumer sentiment numbers. Doug, you’ve got something fresh?
DC
Just got fresh consumer sentiment data … big drop in early March … gasoline prices likely cause. March retail sales may be less upbeat than the ones we got for February this morning
DC
Big picture we think investors want to move towards less economically sensitive areas of the market … most contrarian place to shop for opportunity now is health care
DC
Health care has good yields and VERY low growth expectations … and, often works in the 3rd year of a market cycle!
DC
S&P 500 still flat
CG
John, thoughts on what we’ve seen in the last hour?
CG
as we close (and hang tight people, we’ve got a couple of brief announcements before we go)
JM
FTSE now only down 15
JM
Brent down at 113
JM
S&P flat
JM
Seems like worst expectations not being met — but aftershocks key
JM
So we’ll keep watching over on FT Alphaville, but to finish
CG
yep
CG
okay, some fun housekeeping items here
CG
first, we’re excited to announce that the Rabble’s biggest troublemaker today, Reformed Broker, will be guest-hosting with us next week
CG
he’s one of our favorite fin bloggers, and a truly witty dude
CG
also, we kept away from the RAW today — that’s where you pretend we’re Galleon and you make like a Goldman board member, feeding us tips and market banter, and labeling it such
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
JM
Breaking: Friday, March 11, 2011 11:01:59 AM RTRS – FRANCE’S SARKOZY SAYS EU LEADERS UNANIMOUSLY CALL FOR GADDAFI DEPARTURE
CG
we’re not sure if at some point we’ll do more of that or leave it to our friends in London, but let us know what you think once this is over
JM
Maybe the US Air Force can pick him on the way back from Japan
CG
sorry to those who submitted questions that we didn’t get to, but, well, earthquakes and rage days and whatnot, you know how it is
CG
and finally
CG
a big thanks to Doug for helping out and risking the wrath of his compliance department
DC
Thank you John, thank you Cardiff, and thanks all …
JM
Thanks Doug and thanks all on the right
CG
That’s it, we’re done here, thanks everyone, see you next Friday
JM
Bye!