Crude Oil Spreads Report

The Financial Markets - 19 November 09

• The Federal Housing Administration, the agency that insures home purchases made with down payments as small as 3.5%, may create another lending crisis, Toll Brothers Inc. Chief Executive Officer Robert Toll said. “Yesterday’s subprime is today’s FHA,” Toll said today at a New York conference for builders sponsored by UBS AG. “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.” Toll Brothers is the largest U.S. luxury homes builder.
  
  
• Fed speak was uber-dovish from 2 of the resident hawks, Plosser and Bullard. The former opining that he was as worried about deflation as inflation and the latter thinking out loud that the FOMC may stand pat on rates until 2012. Not exactly the kind of comments likely to attract Dollar buying.
  
  
• The logic of such a reassurance can be shown in the US housing market, where Housing starts and Permits surprised hugely to the downside in October, questioning the stabilisation in the market and allowing risk aversion to nudge higher. One of the reasons put forward for the decline was that the tax credit for first time buyers was due to end this month and construction companies. The signals coming from housing starts underline the uncomfortable reality that a lasting improvement in the US housing market is far from assured.
  
  
• For the first time in the credit crisis, the US government may have run into a problem that is too tough to bail out: commercial real estate… investors shouldn’t expect any meaningful revival of the $700 billion market in Bonds backed by commercial real-estate loans, even with the Fed providing leverage to buy such securities. While popular during the bubble, these securitizations lack the sort of attributes, like large pools of loans with similar terms, to generate strong demand in saner times.
  
  
• The perilous state of UK public finances was once again highlighted this morning as October public sector borrowing fell by less than expected. Public sector net borrowing totalled £11.4bn in October, well above the consensus expectation of £7.0bn.
  
  
• French bank Société Générale has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction. In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the Yen fall. It is not possible for half the world to pursue this strategy at the same time. SocGen advises bears to sell the Dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself.
  
  
• Crude oil traded near $80 a barrel in New York after rising yesterday, as a government report showed U.S. crude and fuel supplies dropped along with refinery production and imports. Oil reached a one-week high of $80.33 yesterday after the Energy Department said crude inventories declined 887,000 barrels to 336.8 million last week. Stockpiles were forecast to increase 300,000 barrels, according to a Bloomberg News survey of analysts. Fuel supplies fell as refiners operated at the slowest pace in more than a year.
  
  
• Steel production in China, the world’s largest maker and consumer, may outpace demand growth this year, spurring exports in the last two months, the China Iron and Steel Association said. Output may rise to a higher-than-expected 565 million metric tons, and demand may gain 18 percent to 549 million tons, Vice Chairman Luo Bingsheng said today in Beijing. The association on Nov. 3 said production may rise 10 percent to 550 million tons this year. Luo’s comments underscore growing concerns that rising Chinese supply will depress prices and spur exports that will compete with regional mills including Nippon Steel Corp.
  
  

• German semiconductor maker Infineon Technologies AG said it swung to a fourth quarter net profit on growing demand for its logic chips and after the prior-year result was hit by heavy losses at memory chip unit Qimonda. For the current first quarter it expects sales on fourth quarter levels but expects sales to rise at least 10% in fiscal 2010 which ends Sept. 30. Revenue for the period was €855 million compared with €1.05 billion a year earlier, adjusted for the sale of Infineon’s wireline segment which was announced in July and completed in November.
  
  
• Despite Dutch semi conductor maker ASML CFO Still seeing 4Q orders intake at least level with 3Q, the stock fell 4% after Bank of America / Merrill Lynch downgraded the stock to neutral from a buy.
  
  
• Intel and Texas Instruments were among the 8 microchip firms also cut to ‘Neutral’ at Merrill Lynch as the brokerage downgraded its view on semiconductor stocks. “Barring a sharp upturn in the global economy, our indicators point to the potential for an inventory correction, thus rendering the risk-reward associated with ownership of chip stocks unattractive,” analysts wrote in a report dated yesterday. The NASDAQ is likely to come under pressure this afternoon on this.
  
  
• Air France-KLM Group, Europe’s biggest airline, posted a loss in its second quarter as the recession pummeled passenger traffic, ticket prices and cargo handling. The net loss was €147 million, or 50 cents a share, in the three months ended Sept. 30, compared with net income of €27 million, or 9 cents, a year earlier, the Paris-based airline said today. The median of four estimates compiled by Bloomberg was for a loss of €130 million. “We’re in the midst of a crisis that is very, very strong,” Chief Executive Officer Pierre-Henri Gourgeon said at a presentation in Paris. Average fares “continue to be impacted by the recession and the decline in business traffic,” he said. Revenue plunged 19 percent to €5.6 billion in the period.
  
  
• Colgate-Palmolive jumped the most in five months in New York trading after the Telegraph called it an “obvious candidate” for a Merger with Reckitt Benckiser Group Plc, citing “well-placed sources.” Colgate, the world’s largest toothpaste-maker, climbed $3.03, or 3.7 percent, to $85.87 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain since June 1. Reckitt, the world’s biggest maker of household cleaners, closed at 3105p today in London. “The latest tale is that Reckitt Benckiser is close to announcing multi-billion Pound cross-border transaction,” according to the Telegraph. “Well-placed sources think the most obvious candidate is US giant Colgate-Palmolive.” The U.K. newspaper provided no details.
  
  
• The world’s largest yogurt maker, Danone, cut its target for medium-to long-term annual sales growth excluding purchases to at least 5 percent from the previous forecast of 8 percent to 10 percent. The stock is off 4%.
  
  
• Blackstone Group LP is to buy Birds Eye Foods, the largest US frozen food company, for $1.3 billion through its Pinnacle Brands Corp. unit, the Wall Street Journal reported, citing people familiar with the matter.
  
  
• SABMiller Plc, the world’s second- largest brewer, reported a 32 percent drop in first-half profit amid “some of the toughest economic conditions seen for decades.” Net income dropped to $973 million in the six months through September from $1.42 billion a year earlier, the London- based company said today. The prior-year earnings included a $437 million gain from combining a stake in its US Miller business with Molson Coors Brewing Co. assets.
  
  
• Volkswagen AG may disappear from Germany’s DAX Index as Qatar exercises options on the carmaker’s common and preferred stock and HeidelbergCement AG’s share sale boosted its chances for a place in the benchmark gauge, analysts at UniCredit Markets and Investment Banking and DZ Bank AG said. “VW common shares will have to leave the DAX some time in December, probably mid-December, as the free float will fall below 10 percent,” Christian Stocker, senior index strategist at UniCredit in Munich, said by phone yesterday.
  
  
• Marks and Spencer surprised the market by announcing that it has recruited Morrisons’ Marc Bolland to be its new CEO. Bolland has done an excellent job at Morrison’s albeit cynics might argue that Morrison was already in an upward trajectory by the time Bolland was installed as CEO, having recovered its poise since the 2004 Safeway takeover debacle. Nevertheless, we would argue that he is a better choice than any of the internal candidates. A modest positive for Marks and Spencer.
  
  
• According to reports this morning the Canadian Imperial Bank of Commerce is continuing to monitor AIB although it is believed to be more interested in the MandT stake than in taking a holding in the overall group. The news follows reports in August that Royal Bank Of Canada was interested in buying a stake in the group. The current value of the M&T stake is €1.2bn, which would release €500-€600m of capital into the group.
  
  
• FBD released a strong interim management statement for the period covering the period July 1 to today, with the insurance group stating that barring any exceptional claims events, full year operating earnings will exceed mean broker expectations of 86c in the current year. Both the underwriting and non underwriting business is expected to produce an operating profit in 2009. The stock trades on just 6.4X bottom of the cycle, cheap for an insurance play.