Beware the bear: Sector leaders can't hold gains, retail looks light

Is there a stealth bear market underway?

While the major indexes rallied on Monday, most people failed to notice the poor close. Financials, which were leading, gave back half their gains. Home builders, another market leader, closed in negative territory. Transports also gave back most of their gains.

Elsewhere

1) Macy's beat on earnings, was a bit light on revenues. Comparable store sales were a disappointing 1.4 percent. So how much of a factor was the weather?

"At one point or another during January, 244 Macy's and Bloomingdale's stores were closed because of weather, and the business remained sluggish until Valentine's Day," CEO Terry Lundgren said. The company operates roughly 840 stores, so we are talking about 30 percent of the stores out of commission at some point during the month.

But here's the key: the company reiterated its guidance from January 8th of this year. They expect comparable store growth of 2.5 to 3 percent, with earnings of $4.40-$4.50. "Once warm spring weather arrives and our full assortment of fresh spring merchandise is in place, we believe customers will return to a more normalized pattern of shopping," Lundgren said.

2) It was worse at Perry Ellis, which cut its outlook for the fourth quarter 2013 and for full year 2014. As ever, bad weather was the culprit, driving down same store sales by 4.8 percent. Perry Ellis has two channels: direct to consumer and wholesale.

Lower mall traffic caused their direct to store sales to drop 4.8 percent year over year. On the wholesale side, replenishment orders "was essentially turned off for many retailers in their effort to manage overall store inventory."

It's pretty simple: retailers have been heavily promotional for so long that the promotions have hurt margins. Those that are not offering steep discounts often lose market share to competitors.

3) Home Depot beat on bottom line, but topline was light. The current year's guidance of $4.38 is a bit below consensus estimates of $4.43, while revenue estimates of $82.59 billion is just below the consensus of $82.91 billion. More importantly, they raised the dividend by 21 percent to $0.47 a share, that's a yield of closed to 2.4 percent.

Look, it was a very impressive year for the company. Fourth quarter comparable store sales were up 4.4 percent, and 4.9 percent for U.S. stores. The background story—home improvement—remains positive for 2014. Management has talked about 4 to 5 percent revenue growth, even if they don't gain market share.

4) Home builder Toll Brothers beat expectations. Here's what they said about the spring season: "While it is still too early to draw conclusions about the Spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand and an industry still under-producing compared to both historical norms and current demographics."

Yet here's what important from chairman Robert Toll: "Although the weather will result in some delays and some additional, but not major costs, it should not result in lost sales or deliveries."

5) Mainland China stocks down another two percent overnight with yuan weakness, property market issues were both a factor. China is now down about five percent in the last three days.

6) New Italian Prime Minister Matteo Renzi won a confidence vote (though not by a large margin). Let's hope he succeeds: at 39, he is the country's youngest prime minister. Meanwhile, his agenda is full of the kind of changes Italy desperately needs: reductions in income and labor taxes, an overhaul of the legal system, and most importantly, an overhaul of the electoral system to favor bigger parties and allow more to get done.

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19:06 | 0 comments

European Stocks Decline From Highest Level in Six Years

European stocks retreated from a six-year high as Credit Suisse Holdings AG led banks lower. U.S. stock-index futures rose and Asian shares were little changed.

Credit Suisse fell 2.1 percent as a person familiar with the matter said U.S. regulators are investigating its accounting practices. Jeronimo Martins SGPS SA dropped 6.3 percent after reporting 2013 net income that missed predictions. Anheuser-Busch InBev NV rose 1.6 percent after the brewer posted earnings growth that exceeded estimates and predicted improvements in its largest markets.

The Stoxx Europe 600 Index retreated 0.3 percent to 337.44 at 11:31 a.m. in London. The equity gauge has advanced 4.6 percent this month, on course for the largest monthly gain since July. It declined 1.8 percent in January. Standard & Poor’s 500 Index futures increased 0.2 percent, while the MSCI Asia Pacific Index fell 0.1 percent.

“There isn’t blind enthusiasm in the market like we had last year, and investors know there won’t be easy wins,” said Tobias Britsch, who helps oversee about $32 billion at Meriten Investment Management GmbH, in Dusseldorf, Germany. “We’re unlikely to see the market running again ahead of earnings. Valuations are not cheap and there may be a little nervousness pushing investors to be more conservative now. Improvements in economic growth and an earnings rebound still need to be proven before many are willing to pile in more aggressively.”

The number of shares changing hands in Stoxx 600-listed companies was 18 percent lower than the 30-day average, according to data compiled by Bloomberg based on volumes at this time of the day.

Equity Valuations

The Stoxx 600 trades at 14.5 times its members’ projected earnings, up from 13.7 times at the beginning of 2014, according to data compiled by Bloomberg.

A U.S. report at 10 a.m. in Washington will probably show sales of new homes declined for a third consecutive month in January. Purchases decreased 3.4 percent to a 400,000 annualized pace, according to the median economist projections compiled by Bloomberg before the Commerce Department releases the figures.

Credit Suisse slid 2.1 percent to 27.62 Swiss francs. The Securities and Exchange Commission is looking into whether the lender improperly moved money in its private-banking unit to conceal a drop in asset growth, the person said.

A gauge of banking stocks was among the worst performers of the 19 industry groups on the Stoxx 600. UBS AG, Switzerland’s largest bank, fell 1.1 percent to 18.19 francs. Barclays Plc, the U.K.’s second-biggest lender by assets, declined 1.5 percent to 254 pence.

Jeronimo Martins

Jeronimo Martins slipped 6.3 percent to 12.19 euros. The Portuguese retailer that gets most of its sales from Poland said net income rose 6 percent to 382 million euros ($525 million) in 2013. That missed the 386.8 million-euro average analyst projection compiled by Bloomberg.

Tesco Plc (TSCO) fell 4.2 percent to 321.1 pence as Oriel Securities Ltd. cut its rating on the U.K.’s largest retailer to hold from add. The brokerage said that Tesco failed to announce sufficient changes at yesterday’s investor day to reverse declining same-store sales.

Lanxess AG retreated 5.2 percent to 51.99 euros. The chemicals maker predicted it would report a net loss of 159 million euros for 2013 when it publishes final figures on March 20. The company took a charge of 257 million euros in the fourth quarter of 2013 because it produced more goods than it could sell and raw material and energy costs were high, according to a statement.

Utilities Decline

RWE AG fell 2.7 percent to 29.52 euros, its second-biggest loss this year. U.K. market regulator Ofgem said energy suppliers will have to comply with new rules from March 31, including having to publish prices at which companies will trade wholesale power as many as two years in advance. The German company generated more than 18 percent of its revenue in the U.K. in 2012, according to data compiled by Bloomberg.

A gauge of utility companies posted the second-worst performance on the Stoxx 600. EON SE declined 2.3 percent to 13.82 euros.

AB InBev (ABI) added 1.6 percent to 75.49 euros. Earnings before interest, taxes, amortization and depreciation, excluding some items, totaled $5.2 billion in the fourth quarter, the brewer of Budweiser beer said today in a statement. That beat the $5 billion median estimate of 11 analysts surveyed by Bloomberg. So-called organic growth of 13 percent exceeded projections for 10 percent.

Swiss Life Holding AG (SLHN) climbed 5.2 percent to 213.20 francs. The country’s largest life insurer raised its payout by 22 percent to 5.50 francs a share. Bloomberg calculations had projected no dividend change. Net income of 781 million francs ($881 million) for 2013 also exceeded analysts’ estimates as premium income rose as costs declined.

Ferrovial SA (FER) added 3.4 percent to 15.50 euros, its highest price since at least 2004, after reporting 2013 net income rose to 727.2 million euros from 691.7 million a year earlier. That exceeded the 586.9 million euros projected by analysts.

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04:47 | 0 comments

JAPAN INFLATION RATE

The inflation rate in Japan was recorded at 1.60 percent in December of 2013. Inflation Rate in Japan is reported by the Ministry of Internal Affairs & Communications. From 1958 until 2013, Japan Inflation Rate averaged 3.2 Percent reaching an all time high of 25.0 Percent in February of 1974 and a record low of -2.5 Percent in October of 2009. In Japan, the most important categories in the consumer price index are Food (25 percent of total weight) and Housing (21 percent). Transportation and communications accounts for 14 percent; Culture and recreation for 11.5 percent; Fuel, light and water charges for 7 percent; Medical care for 4.3 percent; Clothes and footwear for 4 percent. Furniture and household utensils, Education and Miscellaneous goods and services account for the remaining. This page provides - Japan Inflation Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news. 2014-02-26

The consumer price index for Japan in December 2013 was 100.9 (2010=100), up 0.1% from the previous month, and up 1.6% over the year. 

The largest annual upward pressure came from fuel, light and water (+5.5 percent) and miscellaneous (+3.4 percent). Cost of transportation (+2.1 percent), clothes and footwear (+0.6 percent), education (+0.7 percent) and food (+2.2 percent), culture and recreation (+1.6 percent) was also up. Price decreases were reported for housing (-0.4 percent) and medical care (-0.4 percent).

Japan's core consumer prices (all items, less food (less alcoholic beverages) and energy) rose 0.7 percent from a year earlier while all items, less fresh food inflation rose 1.3 percent, accelerating to a fresh five year high.

Compared to the previous month, the prices grew 0.1 percent. The biggest gains were registered in cost of food (+0.6 percent) and culture and recreation (+0.2 percent). Prices of fuel, light and water (-0.2 percent), clothes and footwear (-0.6 percent), medical care (-0.2 percent) and furniture and household utensils (-0.2 percent) decreased.

The consumer price index for Ku-area of Tokyo in January 2014 (preliminary) was 99.2 (2010=100), down 0.4 percent from the previous month, and up 0.7 percent over the year.

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19:38 | 0 comments

Salmond feels the heat over plan to go it alone

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When Ecuador adopted the dollar in 2000 in a desperate bid to restore stability, one economist likened it to a fat woman buying a dress two sizes too small in the hope that it would make her slim.

Alex Salmond, Scotland’s first minister, has drawn similar derision for suggesting the country could opt unilaterally to use the pound, in the absence of monetary union after a vote for independence.

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In branding it the “Panama plan”, Alastair Darling, leader of the pro-union campaign, would no doubt like to hint at a future of economic dependence and second-rank financial institutions.

Yet Panama, one of the first countries to adopt the currency of a powerful neighbour, is often seen as an example of successful “dollarisation”. It adopted the greenback in 1904, shortly after splitting from Colombia under the shadow of US guns – and has maintained low inflation and interest rates, while developing a thriving financial sector and a mortgage market that is the envy of Latin American neighbours.

Steve Hanke, a professor at Johns Hopkins University in Baltimore, who helped Ecuador and Montenegro adopt the dollar and Deutsche Mark respectively, argues the policy has been a resounding success that could “elegantly solve the whole currency problem” for Scotland. “It disciplines the fiscal and financial system because you can’t go to the central bank and force the governor to print money,” he said.

Other economists are far more ambivalent. Countries who adopt others’ currencies are usually tiny, as in the case of Andorra or Monaco; in transition, as were the former communist countries that switched to the euro; or desperate to restore stability. As Angus Armstrong, director of macroeconomic research at the National Institute of Economic and Social Research, puts it: “you borrow credibility”.

For such an arrangement to work, they need to be small, open economies that are closely aligned with that of the currency they are adopting. But Jeffrey Frankel, a Harvard professor who has written extensively on currency unions, cites as additional criteria, “a strong (even desperate) need to import monetary stability . . . a desire for further close integration . . . and access to an adequate level of reserves”.

These are not necessarily the criteria a newly independent Scotland would wish to meet. Moreover, by unilaterally adopting the pound, it would cede control of monetary policy and lose the ability to backstop the banking sector.

Mr Armstrong notes that financial institutions could be forced to move their headquarters from a country that could no longer act as lender of last resort, while use of the pound would not guarantee low borrowing costs.

“In Europe, we’ve seen that getting rid of currency risk is not enough – it can be substituted into country or credit risk,” he said. “People are playing with fire with this stuff”.

Mr Frankel makes the further point that, “Panama is so small that it’s pretty credible – no Panamanian thinks the Fed is going to take into account the welfare of the Panamanian economy. In the case of the UK, it’s different. The Scots probably would expect to influence the Bank of England . . . and they wouldn’t get it.”

Then there are the political implications. Ecuador has proved that it is possible to borrow a neighbour’s currency without sharing their policies: Rafael Correa, currently sheltering Julian Assange in Ecuador’s London embassy, has made anti-US rhetoric a hallmark of his administration.

Yet dollarisation can certainly make it harder to rebel. When the US issued an arrest warrant for Manuel Noriega, Panama’s military dictator, in the late 1980s, it backed up its threats by cutting off the supply of paper currency and freezing Panamanian accounts in New York: gross domestic product shrank by almost a fifth in a year.

An independent Scotland would not need Westminster’s approval to use the pound – but it would have to hope for an amicable split.

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18:12 | 0 comments

Greece’s plight offers clue to future of EU banking system

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There was a brief while last year when Greece looked like a good news story. For the first time since the global downturn hit Europe, the country was reporting decent tourism statistics. Memories of Greece as the doomed coal-mine canary for the eurozone crisis were fading.

Now, though, the healthy chirruping is once again fading to an ominous quiet. There is mounting speculation that the country will need a substantial third package of aid from the so-called troika of bailout authorities (the International Monetary Fund, the European Commission and the European Central Bank). In particular, IMF officials are said to be convinced that the Greek banking system needs up to €20bn of fresh capital – far more than the sub-€6bn that the national authorities, on the advice of outside experts from fund manager BlackRock, believe to be the shortfall.

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Once again Greece – a geographically and economically peripheral member of the eurozone – is at the centre of things.

The precariousness of the country’s finances will, of course, be a political touchpaper, especially in Germany where the population continues to balk at the transfer of wealth from north to south.

But there is a second dimension of importance to Greece’s latest plight. Quite how the row over the health of Greek banks is resolved may well give important insights into the European authorities’ approach to this year’s vast exercise to health-check the whole of the EU’s banking system.

The ECB, the new single banking supervisor across the eurozone, is not due to complete its “asset quality review” – an in-depth look at the value of loans on the books of the big 130 banks – until the autumn. The same goes for the simultaneous stress test by the EU’s umbrella regulator, the European Banking Authority. Hence the focus on Greece as an early indicator of an exercise that many believe could make or break investors’ faith in the integrity of the European banking system.

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Establishing the reasons for the range of estimated capital shortfalls at Greek banks is key.

There will of course be a bit of game-playing. Greece itself is keen to avoid, or at least minimise, the size of a third bailout, and had even tried to divert the remaining €9bn or so of bank-allocated funds from its last bailout package for other purposes. Troika officials, by contrast, are likely to be far more conservative. The bearish argument is supported by the rise in non-performing loans which may not peak for another year.

The ECB finds itself in a tricky middle position that imperils its own reputation. As a result of its new bank supervision powers, it must reconcile the conservative instincts of the troika with its duties in administering the AQR. On this count, it may be reluctant to treat the Greek banks too harshly for fear that it could backfire, not just in Greece but, by extension, to the lenders of other bailed-out countries, too.

In some regions, the only practical option for recapitalising weak banks is a state bailout or bail-in of creditors. Fresh equity from commercial investors is likely to be in short supply. But that in turn risks entrenching the bank-sovereign spiral that has played such economic havoc in the eurozone crisis to date.

Given the delicacy of the situation, it is little wonder that European officials are desperately keen to dispel any idea that the decision on the capital needs of Greece’s banks is some kind of litmus test for the EU health check as a whole.

Straight extrapolation would indeed be misguided. Greece’s economic situation is pretty unique. There are also crucial methodology differences between the troika view of bank capital and the AQR/stress test approach. The first takes a macroeconomic “top-down” approach, incorporating a 30-year view of the likely “lifetime losses” on loans. The second is more micro, with a sharper focus on the next three years.

As troika meetings in Greece continue this week, the noise is already making investors and the general populace nervous about how short of money the banking system really is. A decision is needed – and soon.

For Greece, too harsh an approach would be punishing and could even hurt recovery prospects. But a soft-touch option risks killing the canary altogether – wrecking a fragile faith in Greece, the broader eurozone banking system and the ECB’s oversight of it.

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18:04 | 0 comments

Buffett to modify BofA investment terms

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Warren Buffett’s Berkshire Hathaway has agreed to modify the terms of an investment in Bank of America to help boost the bank’s regulatory capital levels.

Mr Buffett invested $5bn in 2011 as a vote of confidence in BofA, which was then fending off fears about its exposure to the mortgage market. The bank’s share price has since more than doubled.

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However, the investment was made in a form of preferred stock that was later disqualified from contributing towards regulatory capital.

Tweaking the terms gives Mr Buffett a slightly riskier investment by fixing the dividend at 6 per cent and allowing BofA to cancel it if it runs into financial trouble. Another tweak benefiting Mr Buffett means BofA cannot redeem the stock for five years.

The equity now counts as tier one capital, helping BofA’s leverage ratio and moving the company closer to being able to pay bigger dividends and share buybacks.

It is the latest evidence of banks scouring their balance sheets to find ways of improving their capital levels beyond retaining profits or raising new equity.

The amendments are subject to approval at BofA’s annual general meeting on May 7 and Berkshire Hathaway has committed to vote in favour, the bank said. Berkshire Hathaway was not immediately available for comment.

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“If our stockholders approve the amendment and it becomes effective, our tier one capital will increase by approximately $2.9bn, which will benefit our tier one capital and leverage ratios,” the bank said in the filing.

Separately, BofA became the latest bank to confirm it was co-operating with a global probe into foreign exchange markets. More than a dozen regulators across Europe, the US and Asia are investigating more than 15 banks over possible manipulation of the $5.3tn a day foreign exchange markets.

BofA also announced an investigation by the US attorney’s office for the Eastern District of New York into the bank’s compliance with a Federal Housing Administration programme.

The bank has one of the biggest outstanding exposures to litigation and regulatory investigations. BofA increased its range of possible losses – or losses from legal issues that have not yet been reserved for – from $5.1bn to $6.1bn.

In its annual regulatory filing, Morgan Stanley disclosed it had reached a $275m settlement with the Securities and Exchange Commission to resolve allegations it committed fraud when underwriting mortgage-backed securities in 2007.

The Wall Street bank also revealed its total litigation expenses were $2bn last year, up significantly from $513m in 2012 but still much lower than peers such as JPMorgan Chase and BofA.

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17:44 | 0 comments

Fed issues stricter capital rule for foreign banks

The U.S. Federal Reserve on Tuesday released the final version of tight new capital rules for foreign banks, giving them a year longer to meet the standard and applying it to fewer banks than in a first draft.

The reform is designed to address concerns that U.S. taxpayers will need to foot the bill if European and Asian regulators treat U.S. subsidiaries with low priority when rescuing one of their banks.

The largest foreign banks, with $50 billion or more in U.S. assets, will need to set up an intermediate holding company and be subject to the same capital, risk-management and liquidity standards as U.S. banks, the Fed staff said.

(Read more: Foreign banks bracing for tough U.S. Fed capital rules)

The Fed estimated that between 15 and 20 foreign banks would fall under the requirement, which was eased from when the rule was first proposed in December 2012, when the cut-off was $10 billion in U.S. assets.

Foreign banks with sizable operations on Wall Street such as Deutsche Bank andBarclays have pushed back hard against the plan because it means they will need to transfer costly capital from Europe.

"The most important contribution we can make to the global financial system is to ensure the stability of the U.S. financial system,'' Fed Governor Dan Tarullo, in charge of financial regulation, said in a speech.

(Read more: U.S. spat looms with foreign regulators over swap rules)

Europe has warned of tit-for-tat action, with European Union financial services commissioner Michel Barnier saying in October the bloc would draw up similar measures if the Fed pushed ahead with its plans.

The Fed also gave foreign banks a year longer to meet the requirement to set up the new structure, with the new deadline being July 1, 2016. Both changes had been widely expected in the market.

(Read more: EU plans for trading rules widen global gap in bank regulations)

The new structure gives banks less flexibility to move money around than under the current rules, which allow banks to use capital legally allocated in their home country. In some cases, the U.S. rules are tougher than elsewhere.

The rule also subjects foreign banks with global assets of $10 billion or more to stress tests that rely on the home-country stress tests standards, the Fed staff said.

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20:03 | 0 comments