Is the recent contraction in the global stock markets the end of the historical upswing? And the beginning of a long period of uncertainty, insecurity and anemic growth? We saw the first sign in the technical indicators last week. Now the fundamentals are suggesting the same. “The danger of severe deflation in the U.S. is far from over”, Norwegian top analyst warns.
“In a situation with historically high unemployment, workers can quickly begin to underbid each other in the battle for jobs. If the wage falls into negative territory, it would be a serious warning.”
(Article in English, copy of original report in Norwegian)
Last weeks downturn in the global stock markets is perhaps the end of last year’s ascension, and the beginning of a more sideways move in the market. “Our expectations are now a fairly flat stock market in 2010,” Head of Research, Stig Myrseth, at Orion Securities writes in his weekly macro analysis.
U.S. indices fell for a third day in a row Friday, and resulted in the Dow Jones weakest week in a year.
The financial sector are still being tightened (Banking Plan), and less access to credit from China are also contributing to the decline.
Rumors that Ben Bernanke might lose his position as FED Governor amplifies secondary sale.
Fear that Bernanke does not receive support to remain in his second term as Federal Reserve Chairman contributed to selling pressure in the markets.
The Governor period ends this week, and Friday two Senators from Democrats made it clear that they would not vote for Bernanke again.
During the weekend several politicians from both parties expressed support for Bernanke, and Sunday the Republican leader of the Senate, Mitch McConnell, said that he is sure that the FED chief is safe.
On Intrade, an online trading system where you can buy contracts based on political outcomes, the probability that Bernanke keeps the job is calculated to 93%.
The contract was down to a 65% probability on Friday evening
Analyst Meredith Whitney said that Obama’s plan most likely will pass, and this will influence trading revenues of the major financial firms dramatically.
American Express and Capital One Financial Corporation fell respectively 8.5 and 12% after the FBR Capital Markets took down earnings estimates for the companies as a result of expectations of reduced margins and new credit card regulations.
Goldman Sachs downgraded the U.S. metal and steel producers on the basis of expectations of slower growth in the Chinese economy.
Alcoa fell 6%. GE delivered better than expected and guided positively for next year. The share rose 0.6%.
McDonald’s showed higher quarterly sales figures and topped analysts’ estimates. The share rose 0.3%
Obama’s Banking Plan sent the Asian markets down for the sixth day in a row.
The news about the FED chief has led to less risk aversion, falling yen and surging U.S. dollar.
Chinese banks fell as a result of the Bank and China Ltd., announcement to bring in USD 5.86 billion through the issuance of convertible bonds.
JPMorgan Chase & Co. reduced the exposure to Chinese banks in their model portfolio, the fear of the Securities may impair the market in the short term.
Japanese shares fell, especially shipping, car manufacturers and insurance. Mitsui OSK Lines fell 2.8%, Toyota Motor fell 2.0% and Tokio Marine Holdings fell 1.5%.
With a drop of 4% Wall Street experienced its worst decline last week since March.
European stock markets fell 3%, while the Oslo Stock Exchange slid 5.6%.
The sharp downturn is due to several factors: First, the government warning of cutbacks created fears of slower growth in China.
Secondly, due to the turmoil in the banking sector with radical proposals for new regulations.
Further financial tensions is building up in Greece.
And finally; there has occurred doubt on if Mr. Bernanke has the necessary political majority to be reelected as FED chief.
“The American quarter results have also been a source of weakness. Although 80% of the results so far have beaten the consensus, the prices fell. This is because numbers have come in weaker than the unofficial earnings expectations (Whisper Numbers) that this season has been particularly optimistic.”
At Oslo Stock Exchange there was a decline led by typical high beta shares like Golden Ocean, PGS and REC. These weakened, respectively, 16%, 9% and 9%.
Among the large cap’s, only DOM find them self in positive territory. The share rose 14% in good news from Iraq.
In commodity markets there was a sharp decline driven by the China-fear and a strong dollar. Brent Oil fell 6% to 72, while aluminum and gold weakened by respectively 4% and 3%.
In the bond market long prime interest rates drew moderately down, while spreads widens.
Cost of risk on government debt to other countries around the Mediterranean Sea continued to expand.
In the currency market the dollar rose 13 cents to dollars, while the euro went up four cents.
In freight markets fell tank rates 4%, while bulk rates depreciated by 3%.
This Is It?
“Last week marked downturn marks perhaps the end of last year’s ascension and the beginning of a more sideways market. Our expectations of a fairly flat stock in 2010 based on the following:”
• The global economy has bottomed out and will expand the future. The growth rate will, however, will not be much, at least not in the rich part of the world. Secondly, because the cyclical upswing currently is unstable and subject to massive policy stimulus.
• Such a scenario will provide a basis for continued low interest rates, which will add a floor under share prices as long as the upswing in the global economy is not going completely off tracks.
• Commodity prices picked up sharply in 2009, but in a scenario with a hesitant upswing in the global economy and a stronger U.S. dollar as a result of problems in Greece, much of the upside can already have been taken out this time.
• The valuation of shares are fairly average. Both the forward P/E and price/book is on line with the historical average. At the same time the consensus estimates for 2010 seems to be in the high end of the scale.
U.S. Deflation Still A Danger
“Despite the fact that annual growth in consumer prices made a jump to 2.7% in December, thanks to galloping oil prices, is deflation danger still exists,” Mr. Myrseth points out.
“The main challenge is the labor market. In a situation with historically high unemployment workers can quickly begin to underbid each other in the battle for jobs. If wages falls into negative territory, it would be a serious warning.”
“Currently, however, we’re not there yet, as annual growth in hourly wages was 2.2% in December.”
A Downside Look at OSE
The brokerage firm has taken a closer look at the five largest companies at the Oslo Stock Exchange. The companies together make up half the benchmark index, OSEBX, (the weight in the index are given in parentheses):
• Statoil (25%): Statoil will with the current dollar exchange rate and future prices of oil (75) earn 14.90 per share over the next twelve months. A forward P/E on 9.2 flashes that the stock as reasonably valued, or a little under priced. Should oil price fall to 70 p.b., however, EPS will drop to 13.23. And a P/E of 10 on a such earnings implies a share price of 132, and a downside of 4%. In general, Statoil falls 15% for each 10% depreciation in the oil price.
• Telenor (10%): The stock appears to be clearly under priced with a SOTP-value of NOK 90 – 100 per share. As long as the peace agreement with Russia is not crashing, the stock should be an excellent buy at current levels. The positive image is supported by a P/E of 10.9 for this year.
• DnB NOR (8%): It is not easy to see any significant fall in the shares of DnB NOR. Several different methods of valuation implies that the stock deserves a price of around NOK 75. In the short-term perspective, share can come under pressure by the negative sentiment for bank shares in general caused by Obama’s warning about new regulations.
• Orkla (7%): Valuation of Orkla appears to be fairly neutral as the stock trades with a NAV discount around 10%. The swing factor in Orkla is REC. Continuing meltdown in REC will drag Orkla down, and vice versa.
“The review above suggests that the Oslo Stock Exchange, with the current oil prices, is probably not far from a bottom. Should the market fall further, the price of oil will have to depreciate further,” the analyst concludes.
Depending On Oil Prices
How much can we expect the oil prices to fall? Scarcely, down to 70 p.b. or even down towards 60, according to the Norwegian top analyst.
If that happens, Oslo Stock Exchange may fall another 5%.
“We doubt, however, that oil prices will go substantially lower than 70 – unless there’s something seriously wrong with the world economy.”
“The long-term equilibrium level of oil is probably around 75-80. The reason is that such prices seem necessary for the oil companies to invest in new capacity, and to meet the growing demand from emerging economies.”
Orion Securites’ buy recommendations for the coming week is as follows:
1. Royal Carribean Cruises
Here’s a copy of the full analysis (Only available in English).
European Markets Snap Shots
DAX Index, Frankfurt
(Relative Strength Index and On-Balance Volume Indicator)
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