by Shawn Narancich, CFA Vice President of Research
Too Many Cooks in the European Kitchen Greece is once again in the headlines as it attempts to convince key political parties, unions and its citizens that more austerity measures are needed to avoid defaulting on 14 billion euros of debt maturing next month. At stake is a new bailout package that European creditors, the IMF and the European Central Bank (ECB) all must agree upon before funds are disbursed. One logjam disappeared when the ECB agreed to join other Greek creditors in accepting less than 100 cents on the dollar for its debt, furthering the chances of a negotiated restructuring. But as Friday’s strikes and protests in Athens show, this is a tough nut to crack. Tourists, good luck finding a bus ride to the Parthenon.
While the Greek drama plays out, the ECB kept short-term rates at 1 percent this week and is encouraging European banks to participate in the next installment of its three-year loan program due later this month. Liquidity provided by the central bank has been key to calming European bond markets so far this year.
Despite Greece, a Firmer Tone to the U.S. Economy Renewed tensions in Greece spilled over into U.S. markets Friday, with stocks selling off and erasing the week’s modest gain, as cyclical sectors led the decline. Although trading volumes remain light so far this year, stock prices continue to be supported by encouraging economic data. Weekly unemployment claims fell again and money supply statistics are confirming the loan growth necessary to fuel expansion. Accordingly, economists have begun to ratchet up their estimates of first quarter GDP.
Delivery Is Guaranteed, but for Whom? Canadian Prime Minister Steven Harper flew to Beijing this week for only the second time in his six-year tenure, and it wasn’t to chastise China for voting against the UN resolution to push Syria’s Assad from office. At $100 oil, only Saudi Arabia has larger oil reserves than Canada, and Harper is seeking to secure buyers as it ramps up its oil sands production. Why not ship it south? The reason is the oil needs a pipeline for transit, and Washington refuses to issue the permit for the Keystone Pipeline Project. The oil will be produced either way because Canada stands to gain. The price of oil from Canada’s WesternSedimentaryBasin was recently quoted at $62; compare this with similar quality crude from offshore Nigeria at $120/bbl and the economics come into sharp focus. The sooner Canadian oil reaches water, the narrower this differential will become, so whether it be the U.S. Gulf Coast or the Port of Kitimat, British Columbia—Canada’s oil is destined for higher priced markets.
Perspective on Earnings Season With about two-thirds of the S&P 500 having now reported fourth quarter earnings, slower growth, peaking margins, and less optimistic guidance are evident. How significant has Apple’s earnings power become? Exclude it from the S&P 500 and the 5 percent profit growth reported so far drops to less than 2 percent. Bellwether names such as Cisco and Coca-Cola reported encouraging results this week but the stocks failed to respond as investors pause to reassess substantial gains already realized. The final weeks of February will book-end fourth-quarter earnings, giving investors the opportunity to assess reports from smaller companies and the retailers, which report a January fiscal year-end.