Was it really that much of a surprise to move the Dow 400 points off yesterday’s low? Nope.
Though we remain concerned about a “terminal” Euro, here’s our commentary from Weekly Eurozone Watch last week,
Post Greek election and rumors of German softening on sovereign bond buying send shorts scrambling. Portugal closes below 10 percent for the first time in over a year. Markets seem to be sniffing a bazooka and/or big policy shift.
And here’s an excerpt from a piece one of us co-authored in the FT last September. Last September!
The eurozone is caught in a vicious circle. Sovereign credit is deteriorating, reducing confidence in banking systems, which in turn increases the likelihood that governments will have to assume additional bank liabilities. This further impairs sovereign credit, which further undermines confidence in the banks…
They [EU] must immediately demand consistent accounting treatment and regulatory oversight of European banks’ sovereign exposures. The International Accounting Standards Board has taken a first step, raising questions about whether eurozone banks are provisioning adequately for losses on government bonds. The problem it points to, inadequate reserves, is precisely what stops policymakers providing meaningful debt relief for the crisis countries.
Europe already has a model it can follow to ensure consistent accounting treatment and adequate reserves: the interagency country exposure review committee created by the US in 1979, and given powers to require banks to allocate specific reserves for assets impaired by country risk. This proved crucial in setting the stage for the Brady Plan that ultimately resolved the Latin American debt crisis.
The European Banking Authority could organise regulators into a similar committee. But it is essential that someone, as in the US, has the final say over the allocation of reserves. This should not be national regulators, who are too close to the institutions they regulate, but the EBA. The IMF and the international community should insist.
Second, the European financial stability facility should be used to inject capital directly into banks incapable of setting aside the required reserves, as Christine Lagarde suggested at Jackson Hole. But the problem the IMF’s managing director did not acknowledge is that the EFSF itself is inadequately capitalised. Hence, a facility financed by the G20 and led by the Asian countries, which are flush with funds, should be created to purchase preferred shares in European banks.
The level of market noise, which we confess to making our contribution, doesn’t make it easy to trade. The long-term blends with short run; the macro drowns out the micro; the falcon cannot hear the falconer; things fall apart; the market cannot hold its bid (hat tip W.B!) The result is the big shorts push the markets around like a lion playing with a mouse and then rush to cover before everyone else.
Clearly the policy announcements from the EU summit are welcome short-term
measures plans and the markets shorts are acting accordingly. However, the long-term outlook for the Euro still remains bleak, in our opinion.
Think about it.
If Merkel was ganged up on or “outflanked” at the summit according to the press and the Germans hold the purse strings, how will the “no strings attached” bond purchases play in Berlin? The potential political blowback reaffirms our end game scenario that Germany eventually leaves the Euro and a new Deutschmark zone evolves in Northern Europe, which we think is the best worst path for the Eurozone.
Furthermore, the macro is now catching up with the micro. Take a look at NIKE stock today. This was THE play for the upcoming Olympics and 2014 World Cup in Brazil and is getting obliterated today after yesterday’s earnings release.
Nike management cites currency moves as a major cause of their lower guidance,
For our ongoing businesses, we expect FY ’13 constant-currency revenue growth at or slightly above our high single-digit target range, in line with the guidance we gave on our last call. However, on a reported basis, we now expect mid-to-high single-digit revenue growth, reflecting the recent erosion of foreign currencies, particularly the euro…
In aggregate, we expect our ongoing operations, excluding Cole Haan, Umbro and the associated divestiture impacts, to deliver high single-digit EPS growth in FY ’13. This is below our long-term goal of mid-teens EPS growth as a result of the significant negative impact of weaker international currencies on both gross margin and translated foreign earnings, as well as a higher effective tax rate.
Ford is also not doing so well today after its earnings warning yesterday. The negative macro environment is finally showing up in the micro with weaker earnings. This should make for a rough earnings season and a volatile rest of summer.
(click here if charts are not observable)