Markets Live chat transcript for the chat ending at 16:04 on 27 Jan 2012. Participants in this chat were: Cardiff Garcia Joseph Cotterill, FT
CG
Hello!
CG
Hello!
JC
Hola
CG
Who’s here?
CG
We’re fired up
CG
lots of ground to cover today
JC
Welcome to US Markets Live
JC
FT Alphaville’s weekly conga round Uncle Sam’s bourses
JC
and some macro, too.
JC
Cardiff – shall we start with the Q4 GDP number then?
JC
(Sorry Rabble if you’re having to refresh)
CG
yes indeed
CG
once i stop getting kicked out
CG
(yes indeed Rabble — and we’re having the same problem)
CG
Jarvis, I can’t spill the beans on what happened, but RIMM’s CEO was in the FT offices this morning
CG
look for stories in the paper/web site coming later
CG
Hello econgirl, Icarus, Rain, OH
CG
let’s get started
JC
Easier when there’s one of them, I guess.
3:06PM
CG
hah, indeed
CG
so JC, i’m gonna run through some GDP thoughts
CG
these are my own, then we’ll turn to some “expert” commentary
CG
briefly
CG
1) big climb in durabe goods spending which suggests
CG
that the depreciation cycle might be ending and people will soon start buying
CG
the bigger items they’ve held off on for a while
CG
emphasis on “might”
CG
(hi paver)
CG
2) Big government drag, but the news
CG
wasn’t all terrible
CG
Federal spending decline was all in defense
CG
Nondefense climbed and reversed the fall in Q3
CG
State and local drag down again, but
CG
or rather, the drag was up, the spending was down
CG
but lately there are signs that tax revenues are up
CG
suggesting this will soon ease
CG
now, some bad-ish news
CG
3) Big jump in inventories
CG
combined with weak sales
CG
Nothing good to say about that
CG
According to Barcap
CG
inventory accumulation accounted for 1.9 percentage points
CG
biggest single contributor
CG
(hello schoneblume, wphilt, good to have you)
CG
4) Nothing good to say either about negligible growth in both residential and non-residential structures investment
CG
And here’s this from Miller Tabak
CG
The upshot is that when you strip out inventory activity from the top line number we’re looking at a slide in activity from 3.2% in Q3 to 0.8% (remember inventories added to Q3 growth).
CG
not a report to get excited about, and
CG
you’re right, icarus, “ish” wrong
CG
just bad
CG
I’ll also note
CG
that I bloody hate this report
CG
revisions come later, and
CG
should be considered in combination with GDI, often the more accurate
CG
measure
CG
You’ve been warned
CG
Now here’s something from Barcap, who tend to be more optimistic than I
CG
All in all, looking past some of the volatile movements that are unlikely to persist – such as the sharp rise in inventories and sharp drop in defense spending – today’s report provides a picture of modest, if unspectacular, growth in domestic demand. Our view remains that the recovery will continue gradually to build momentum, but this is unlikely to shift the dovish stance of monetary policy.
CG
Goladaman, we aim to please, or at least overwhelm
JC
OK
CG
one more JC
CG
and then we can move on from GDP
CG
Holiday spending did filter indeed through in fourth quarter GDP but not at a much faster pace than in the prior quarter. Expenditures contributed 1.5% to fourth quarter GDP and despite record holiday sales that compares to a 1.2% contribution in Q3. In a sense the surge in November credit card and auto loans is curiously missing from today’s data. (Note that the following table details the contribution from components to GDP.)
CG
that’s from MT, though it’s not entirely right. one positive was that auto sales were up
CG
but anyways
CG
JC, any thoughts?
CG
this will soon be YOUR HOME
JC
Oh yeah. So it will.
JC
(Joining Cardiff in NY by end of next month, rabble.)
CG
roddy, possibly, and I’lll have a post on seasonality up later
CG
though generally
JC
Mostly I’m trying to work out how US healthcare works, btw
JC
so…
CG
the weather is less of an issue than how the adjustments are calculated
CG
anyways, JC, please continue
JC
I liked this Trend Macro chart, just seen on Twitter (H/T Pawelmorski)
JC
Trend Macro – think that’s where that Lorcan guy works
JC
And oh, just wanted to pass this on from Bloomie’s Linda Yueh
JC
US GDP: Govt cut spending at 4.6% annual rate in Q4, 5th straight quarterly decline. For all of 2011, -2.1%, the biggest decline since 1971.
CG
yeah, the boom in consumption for the last couple of decades for the middle class has been mostly a healthcare story
CG
yep, and forecast to continue being a drag
JC
Ooh, speaking of sick people
JC
Some breaking M&A news, if I can squeeze it in here
CG
yes please
JC
Actually it’s a bit boring. Roche vs Illumina
JC
RTRS-ILLUMINA’S BOARD OF DIRECTORS TO REVIEW UNSOLICITED TENDER OFFER FROM ROCHE
JC
Taking on Goldie and BofAML as financial advisors.
CG
that’s okay. these kinds of deals are good practice for what we’ll have to cover if we ever enter another Great Moderation 
JC
RTRS-ILLUMINA -”INTENDS TO ADVISE STOCKHOLDERS OF ITS FORMAL POSITION REGARDING THE TENDER OFFER WITHIN TEN BUSINESS DAYS”
JC
Arbitrageurs, on yer marks
JC
OK – dealmaking interlude done with.
CG
heh, thanks, good to have it out there
CG
Icarus, one of our commenters today said we’ve been pushing a new Great Depression scenario since last summer. I’m getting it from both sides today
3:20PM
CG
So Roche will soon be taking over a mysterious cult inside the Vatican. Well, maybe they’ll be better managers and the leaks to Dan Brown will finally stop. Okay, so
CG
on GDP
CG
I’ve little more to say, to be honest
CG
especially given the visceral negative reaction I have to the advance estimate
CG
JC, shall we move on?
JC
Yeah. Let’s
JC
Shall we range over to Greek PSI for a sec? Econgirl just mentioned it
CG
(Icarus, in all seriousness we certainly try to be open-minded. And wiling to admit when we’re wrong)
CG
Yep, let’s
CG
switch to PSI
CG
I’ll try to keep up
CG
so, what’s the latest?
JC
I really mean the ECB’s Greek bond holdings
JC
As that’s dominated the headlines this week
CG
yep, thought I saw you tweet yesterday that essentially the ECB now decides the fate of Greece
CG
the ECB seems stuck, no? no good options
JC
Well, yeah. Esp when you add the GGB holdings to its liquidity to Greek banks
JC
There’s a nicely abrupt quote from Jorg Asmussen today…
JC
(Asmussen = the new Juergen Stark)
JC
PSI stands for private sector involvement, the ECB is not private
JC
Which ignores the basic problem here
JC
Which is that the HOLDINGS are private. Private, plain vanilla, pari passu GGBs
JC
And on that point – outside the ECB – most of the proposals are still based on this
JC
1) The ECB possibly moves the holdings to somewhere else (eg. the EFSF)
JC
2) In doing so, the ECB sells the bonds on at the price it bought them
JC
Whatever happens, I would not bet that the ECB gets left alone completely
JC
i.e., paid out at par.
JC
Interesting Greece fact, incidentally
JC
The Athens Stock Exchange’s market cap is €24bn ($31bn) or so
CG
this isn’t my bailiwick, but from my limited understanding, if the ECB takes a hit on its GGBs, isn’t the worry that the Greek banking system gets hammered because it can no longer pledge GGBs as collateral? or is that way off?
JC
Or about 10 per cent market cap to GDP. Worse than a few frontier markets
JC
Ah – status of Greek banks’ GGBs is kind of separate
JC
The bailout that comes with PSI
JC
Has about €35bn of eurozone guarantees on Greek bank borrowing from the ECB
JC
Given their GGBs will be in default during the time it takes for PSI to go through
JC
Also, just digging out something from Deutsche Bank on Greek banks and the ECB, earlier this week…
JC
Well – oops – I’ve lost it.
JC
But it pointed out that the ECB’s loosened rules on loans accepted as collateral
CG
hah
JC
might help out Greek banks here
JC
And on this note, I’ll observe that Greek bank stocks have been all over the shop this week.
JC
Anyone holding the March 2012 Greek bond here, by the way?
CG
I’d missed that bit about the guarantee, cheers
CG
Yes, anyone here on behalf of Bild?
CG
okay, anyone have a final question for JC before we move on to some companies?
JC
Essentially – Greek banks probably hold a lot of that bond, given it had (until recently) a fairly high price compared to other GGBs (about 40 cents in the euro, versus 20 etc) and was thus valuable as collateral
JC
Which is a long way of saying, they’re not going to join you on holding out on that bond
JC
They already have an exit (the guarantee)
JC
Can we move back to US companies now?
CG
yep, let’s do that
CG
mixed news the last couple of days
CG
thought we’d start with the good news, for a change
CG
Caterpillar
CG
so first, a brief take from Goldman
CG
which just raised its EPS target in light of their results yesterday
CG
We raise our 2012-13 EPS by an average of 10% to $10.10/ $11.95 due to a sharper US construction equipment recovery, lower pension, and share gains in Europe and Asia construction equipment markets.
CG
a bunch of numbers for the nerds up next, followed by some plain English
CG
(1) N America construction equipment recovery is accelerating, with United Rentals increasing capex by 30% in 2012, URI and RSC increasing pricing by over 5% in 2012, and CAT delivering 50% higher 4Q retail sales. (2) Emerging recovery in locomotive capex, with EMD sales up 37% in 4Q and 15% above our estimate. Our rail capex survey points to a doubling in US locomotive sales and a 40% increase in EMD globally in 2012. (3) Strong cost control, as CAT confirmed a $350 mn cut in incentive comp and guided to flat pension expense vs our +$140 mn estimate. (4) Consistent operating performance, with adherence to 90-day build schedules still in the mid-90% range.
CG
now here’s the FT on what
CG
the results and guidance mean for the rest of the year
CG
Caterpillar said it would increase its capital expenditure this year to $4bn from $3bn in 2011 to take advantage of what it believes is a multiyear economic up-cycle.
CG
The company said it expects revenues of $68bn-$72bn this year and profits of about $9.25 per share, ahead of the $9.07 analysts expected. It issued its outlook as it reported profits for the fourth quarter of last year that far exceeded Wall Street forecasts. Caterpillar earned $1.5bn in the fourth quarter, up from $968m in the same period a year earlier.
CG
Stripping out the impact of its November 2010 acquisition of Bucyrus International, the mining-equipment maker, Caterpillar earned a net profit of $2.25 per share, well ahead of the $1.69 analysts had been expecting on average.
CG
The figures completed a year in which Caterpillar notched up record revenues, profits, exports and order backlog.
CG
a much cheerier
CG
perspective than that provided by this morning’s GDP numbers
CG
and here’s the outlook
CG
While Caterpillar echoed concerns that policymakers could derail the recovery by prematurely tightening economic policies, the company said it expected the US economy to pick up steam this year and added that “the risk of a worldwide recession has diminished significantly”.
CG
The vote of confidence in the US was underscored by Eaton, the manufacturer of industrial equipment and components for trucks and aircraft, which said it expected its markets to grow faster in the US than in the rest of the world for the first time since the mid-2000s.
CG
and the stock is still up a tad from yesterday
CG
now hovering at about 111
CG
@Rain, Soros is apparently a big hit at Davos this year
CG
Anyways, that’s the good news from Caterpillar. JC, wanna talk about some less-than-great news from P&G today?
JC
Sure
JC
(Incidentally, groaner of a research headline from SocGen’s Brian Jones just now)
JC
US GDP: GDP rhymes with QE3!
JC
But, as you said, P&G
JC
I never knew hairdressers could be so lethal to a global mega-corp
JC
Goodwill and Intangibles Impairment
During the quarter, the Company took a non-cash charge of $1.5 billion after tax, or $0.50 per share, to adjust the carrying values of goodwill in the Appliances and Salon Professional businesses, and trade name intangible assets in the Salon Professional business. The impairments were primarily driven by the prolonged deterioration of the macroeconomic environment, the more discretionary nature of the products, and increasing levels of competitive activity. Together, these factors have led to a reduction in expected market size and growth rates for both businesses. This is particularly the case in the Western Europe market, where roughly 50 percent of P&G’s Appliances and Salon Professional sales are generated. As a result of these factors, the Company recently has reduced the sales, earnings and cash flow forecasts for these businesses.
CG
haha
JC
P&G takes profit haircut on fewer Western European haircuts
JC
there’s yer headline
CG
“increasing levels of competitive activity.” lots of whining there
CG
well done
CG
lowered guidance for later than
CG
not gonna get easier for their european or EM sales, btw, if
JC
Yeah – $4.00-$4.10
CG
the USD stays resilient
JC
versus $4.15-$4.33
JC
I think the thing with P&G and their ilk is dollar strong, commods strong = ouch
CG
exactly, strong dollar plus equivalent of consumer tax = crap sales
JC
Little change in expectations in commodities prices from the CFO, btw.
CG
think they’ve also had supply chain problems for a while, not sure where they are with that
CG
btw, since i forgot to this at the start
CG
Dow Jones
12,662.50 -72.13 (-0.57%)
12,662.50 -72.13 (-0.57%)
S&P 500
1,313.92 -4.51 (-0.34%)
Nasdaq
2,806.20 +0.92 (0.03%)
CG
basically a mildly weak reaction to GDP numbers
CG
(good morning A Reader)
JC
Not much interesting comment on P&G either
JC
So, what to cover in the last ten minutes?
CG
yeah, one last thing on P&G
CG
Finally, a recent fumble suggests P&G’s operational cogs aren’t all clicking. After building up expectations that it would release a “revolutionary” capsule laundry detergent called Tide pods in August of last year, the company pushed back the release date to this February. Now it looks as if supply issues have curtailed how much of the new product will hit the shelves next month.
This is just one of several supply-chain problems that the company has experienced recently, notes Sanford C. Bernstein analyst Ali Dibadj. If the company is losing its longtime knack for smooth new-product launches, it will have a harder time riding out storms.
CG
just from this morning’s WSJ
CG
okay, so last nine minutes
JC
“tide” “pods”?
CG
Attitude, could have been, yeah, think expectations were for slightly better and given the underlying details, wouldn’t have been surprised
CG
with a bigger negative reaction
CG
but who knows what’s driving what
CG
possibly next week’s unemployment numbers will be a bigger deal
JC
I now can’t get GDP rhymes with QE3 out my head
JC
So to close, maybe we should have a last look at this week’s FOMC?
CG
Sure
CG
general take was that
CG
it was a confusing muddle, but on the whole sent a dovish signal
CG
as one analyst wrote, more transparency leads to less clarity
JC
(The 5-yr’s still around its post-FOMC low of 0.76%, incidentally)
CG
but i’d say there are now better than even chances we’ll get some version of QE3 soon
CG
especially if the inflation numbers from this morning’s GDP report hold
CG
yeah, most places along the curve flattened with the exception of the 30-year
CG
Attitude, yeah, but in this there were some contradictory signals — majority of the FOMC wanted rate hikes at or before 2014, but
CG
voting membership carried the day
JC
Just a bit here from BofAML’s Jabaz Mathai, on inflation expectations
CG
plus obvs can’t directly link forecasts for rate paths to unemployment/inflation for individual members. all of this will come up in later years, i suspect
CG
yep, please JC
JC
The first order effect of the Fed’s policy is for a rise in breakevens, especially in
the belly of the breakeven curve (the 5y to 10y sector), given current levels of
breakevens and the potential for inflation expectations to rise. The second order
effect is for a flattening of the breakeven curve, given that 5y breakevens are at
1.8%, while 10y breakevens are at 2.2% and 30y breakevens are at 2.3%, as
shown in the Chart of the day. Note that the long-term difference between
headline PCE and headline CPI (which is the index used for TIPS) is about 33bp on a historical basis. It is likely that 30y breakevens would be anchored for the most part around the 2.2% to 2.5% level. As breakevens increase, real yields are also likely to decrease, keeping nominal rates low. The impact of concentrated purchases in Treasuries in the form of quantitative easing for example should depress real yields, rather than breakevens.
The first order effect of the Fed’s policy is for a rise in breakevens, especially in
the belly of the breakeven curve (the 5y to 10y sector), given current levels of
breakevens and the potential for inflation expectations to rise. The second order
effect is for a flattening of the breakeven curve, given that 5y breakevens are at
1.8%, while 10y breakevens are at 2.2% and 30y breakevens are at 2.3%, as
shown in the Chart of the day. Note that the long-term difference between
headline PCE and headline CPI (which is the index used for TIPS) is about 33bp on a historical basis. It is likely that 30y breakevens would be anchored for the most part around the 2.2% to 2.5% level. As breakevens increase, real yields are also likely to decrease, keeping nominal rates low. The impact of concentrated purchases in Treasuries in the form of quantitative easing for example should depress real yields, rather than breakevens.
JC
Flatter and higher, basically.
CG
yes, and btw
CG
worth noting that there have been pretty big subsequent revisions for PCE as well, though obviously
CG
at some point you just do your best with the data you have. but it will be an issue with respect to the target
CG
anyways
CG
also check out izzy’s post the other day on possible unintended consequences in us repo markets, and how that might later affect funding costs for some banks
CG
for our part, we gotta go
JC
Yep. Thanks for joining, rabble
CG
Attitude, that’s right, and usually it’s not so big. but there have been meaningful (dozens of bps) divergences in the past, so just something worth watching
CG
have a great weekend everyone
JC
Bye! London ML returns on Monday.
CG
Thanks everyone, bye!
JC
Until then, ta-ta for now.