France and eight other euro-zone countries suffered ratings downgrades on their sovereign debt Friday, sparking renewed worries over Europe’s ability to bail itself out of crisis. (Chart courtesy of WSJ)
“In our view, the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” the ratings firm said. “We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues,” it said.
In Athens, talks broke down Friday between Greece and a group of creditors negotiating to restructure its debt. If no deal can be reached, Greece will need billions of euros in additional aid to help it make a big bond repayment in March. The alternative is a messy default.
S&P had warned Dec. 5 that it could downgrade all sovereigns. It has rather taken a more selective approach as seven countries were left unchanged while there were one notch downgrades for five countries and two notch downgrades were given to four countries. The French downgrade will likely complicate domestic politics ahead of the general elections this spring.
S&P’s decision means that Europe’s rescue fund, the European Financial Stability Facility, could lose the triple-A rating it needs to borrow cheaply and lend to ailing euro-zone governments. As France is the second-biggest contributor to the fund’s guarantees, the chances are greater that the EFSF’s capacity will be crimped or its borrowing costs will rise.
The decision to cut Italy by two levels, from single-A to triple-B-plus, caught some analysts off-guard. The move is likely to have a ripple effect on the ratings of Italian banks, driving up their borrowing costs and exacerbating their funding woes. Italy’s banks, which are major holders of Italian bonds, are struggling to meet demands by European regulators to raise more capital to cushion against the debt crisis.
All of the above were generally expected in markets.
Here’s yesterday’s big thing:
Letter says plans water down treaty
Jörg Asmussen, a member of the ECB’s executive board, wrote to negotiators that new provisions in the treaty that would allow highly indebted eurozone countries to breach budget deficit limits “in periods of severe economic downturn” amounted to an “escape clause” that could lead to “easy circumvention of the rule”.
Potentially more troubling for government negotiators, Mr Asmussen went on to argue that the treaty must “move towards a deeper and more effective co-ordination of fiscal policies”, a stance that some officials believe goes beyond the mandate given to treaty negotiators at a highly charged summit last month.
And by the way,
“May I remind you that this agreement on a fiscal compact was reached against a background of serious and ongoing threats to macroeconomic and financial stability in the euro area,” Mr Asmussen wrote.
The ECB is the only credible actor in Europe and Draghi wants a clear and effective fiscal compact… to be delivered in two weeks!
The next several weeks will be “interesting”. Greece, the ESFB, the fiscal compact and the French elections. Fasten your seatbelts.
J.P. Morgan dampened the New Year rally for bank stocks, saying on Friday that its fourth-quarter profit fell 23% from a year ago amid a sharp slowdown on Wall Street.
Earnings were $3.73 billion, or 90 cents a share, down from $4.83 billion, or $1.12 a share, a year earlier. Results were hurt by an accounting loss tied to the market for bank debt. Revenue dropped 17% to $22.2 billion, below analyst expectations.
The fees J.P. Morgan generated from investment banking fell 39% from the year-ago quarter to $1.1 billion, and revenue from fixed-income trading dropped 13%. Total revenue for the investment bank fell 30%, to $4.3 billion.
“We are getting killed in mortgages if you haven’t noticed,” Mr. Dimon said on a call.
Yet, a decline in mortgage delinquencies let J.P. Morgan slash its loan-loss reserves by $730 million.
The only good news from the call:
J.P. Morgan’s results show that companies are taking on more credit to fund inventory and capital improvements. The bank’s total loan book rose 4%, as lending to middle-market and corporate banking clients climbed 12% and loans retained by the investment bank were up 28%. The loan demand is “everywhere,” Mr. Dimon said. “Industrial, consumer, Asia, Latin America, trade finance, corporations, all types of corporations.”
The bank’s results also show U.S. consumers are defaulting less. Delinquency rates on loans fell across the board, especially in credit cards.
German business software giant SAP said it beat its 2011 full-year forecast after it recorded strong growth in the fourth quarter, pushing its shares higher.
THE JANUARY BAROMETER AND THE DECEMBER LOW INDICATOR
by Jeffrey Saut, Chief Investment Strategist, Raymond James and Associates (via AdvisorAnalyst Views)
(…) Admittedly, the January Barometer has a pretty good track record. To wit, according to the Stock Trader’s Almanac (as paraphrased by me):
Devised by Yale Hirsch in 1972, our January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only seven major errors since 1950 for an 88.5% accuracy ratio. . . . Including the seven flat-year (minor) errors (less than +/- 5%) yields a 77.0% accuracy ratio.
The Hirsch organization also notes:
The last 38 up First Five Days (of the new year) were followed by full-year gains 33 times for an 86.8% accuracy ratio and a 13.9% average gain in all 38 years. … Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction.
Now given that historically the equity markets have a bullish tilt 67% of the time, the first week of the new year typically gives the January Barometer a bullish start for the month.(…) Yet, there is one indicator that I give more credence than the January Barometer.
Back in the early 1970s, when I was working on Wall Street, I encountered a man who became my friend and one of my mentors. At that time Lucien Hooper, then in his 70s, was considered one of the savviest “players” in this business, as well as the second longest contributing editor to Forbes magazine. While known for many market axioms and insights, the one that stuck with me the most was Lucien’s December Low Indicator. It seems as if only yesterday we were sitting at Harry’s at the Amex having lunch when he explained it. “Jeff,” he began, “Forget all the noise you hear about the January Barometer. That being, ‘so goes the first week of the new year, so goes the month and so goes the year.’ Institutions can manipulate prices for a short period of time, especially during a holiday-shortened week with a limited audience. Consequently, pay much more attention to the December low. That would be the lowest closing price for the INDU during the month of December. If that low is violated during the first quarter of the New Year, watch out!”
For the record, the Dow’s closing low in December was 11766.26, recorded on 12/19/11. “Circle” that low and watch it closely during the first quarter of 2012. If the Industrials travel below that low then respect Lucien’s “watch out” warning, for it has proven prescient since in all but two instances since 1952 when the December low was violated during the first quarter the Dow slid another 11% on average. Importantly, if the December low is not breached in the 1Q, heed the January Barometer since when taken in conjunction with the December Low Indicator it has been right nearly 100% of the time.