Friday, November 23, 2007

Shop till you drop

Retailers are in focus today. It is Black Friday, traditionally the start of the holiday shopping season. Over the weekend we will hopefully find out if major retailers lifted themselves out of the red into the black numbers of profit. The number to watch will be the 6% same store sales growth of last years magic Friday.

Aside from retailers again in focus are bond insurers, which are on the brink of being downgraded by the rating agencies and therefore have capital work to do. There are concerns about the stability of FGIC, MBIA, Ambac Financial and their competitors, as well as the safety of the $2.4 trillion of securities they guarantee. The companies are being reviewed by Moody's Investors Service and Fitch. Financial Guaranty Insurance, the insurer for $315 billion of bonds, may get the capital it needs to avoid losing top credit rankings after French banks bailed out competitor CIFG Guaranty. Groupe Banque Populaire and Groupe Caisse d'Epargne agreed to take control of CIFG yesterday from their Natixis banking subsidiary and doubled the company's capital with a $1.5 billion investment.

H&R Block on Friday said the subprime lending unit it is trying to sell has obtained $350 million of new funding capacity from a unit of Royal Bank of Scotland Group. Separately, the company said its Block Financial Corp unit on November 20 drew down $100 million from two credit lines, giving it $1.725 billion out of a possible $2 billion outstanding. It was at least the fifth draw down since mid-August.

In the UK the mortgage market is further declining. The British Bankers' Association said the number of mortgage approvals for house purchases dropped to 44,105 in October from 52,685 in September, pressured by household finances.

The troubled sector in the financial services industry seems to get ever closer to a point where it might need some serious help. Could this help come from oil rich nations many ask? Six months ago, that question might have seemed almost laughable. But as oil price edges higher and Western credit markets are in pain, the idea is now being quietly voiced behind the scenes at some Western financial groups.

Nouriel Roubini in his Global EconoMonitor sees a " generalized systemic financial meltdown" heading our way.

A very bleak outlook indeed. While Roubini's article is sparse on numbers, loss about $500 billion plus on subprime, the
Organization for Economic Cooperation and Development believes total global losses stemming from the U.S. subprime crisis could reach as much as $300 billion. Most of the losses will occur not in the form of mortgages themselves, but rather in the form of writedowns and fire sales of mortgage-backed securities repackaged within CDOs, they said. Obviously nobody knows the exact amount of the financial losses related to subprime. This is exactly the major problems in the credit market and the reason why banks are reluctant lending to each other and eager pumping up their balance sheets.

In Europe The risk of companies defaulting on their debt rose. Contracts on the iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 4 basis points to 394 basis points. The iTraxx Europe index of 125 companies with investment- grade ratings rose 1 basis point to 63.

ECB Governing Council member Miguel Angel Fernandez Ordonez said he saw a stronger than expected slowdown in the euro zone and that there was not enough data to dispel uncertainty about the effects of financial market turmoil. The euro, after earlier almost hitting the 1.5 mark on the dollar, was knocked more than a cent off its peak.

The dollar fell to 107.68 Japanese yen, dropping below the 108-yen level for the first time since 2005, down from 108.62 yen late in Europe on Thursday. The dollar weakness leads to some worrisome developments. The New York Times reports on a growing trend in Japan among individual investors of reallocating funds invested in the U.S. to faster growing emerging markets. Japanese investors have reduced holdings of domestic mutual funds investing in the U.S. in 16 of the past 17 months. Japanese investors have invested the dollar equivalent of $17.5B into emerging market funds over the past year, while reducing holdings of North American funds by $4B.

Airbus, a unit of European Aeronautic Defense & Space, earlier this week warned that the level of the euro against the dollar threatened the life of the company. German Chancellor Angela Merkel told N24 television on Thursday that the strong euro and high oil prices pose a risk to the country's economy. Asked about future developments many see a trading band of 1.5 to 1.6 to the euro and decline to pin down a critical exchange rate. This could probably mean that we have further meaningfully downside ahead of us. Gernot Nerb economist from the Ifo Institute said Friday, The euro is fundamentally overvalued against the dollar, but market volatility is likely to persist.

The U.S. Thanksgiving holiday weekend kept many traders on the sidelines, while Japanese financial markets were closed Friday for the Labor Thanksgiving Day holiday. The Hang Seng rebounded 2%. European markets were also broadly up and future markets in premarket trading pointed to a higher opening in the US.

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