Five Things You Need to Know: Hey, China Takin' Cheapshot at Our Foldin' Money; ECB Facing the Fed's Familiar Spot Between Rock, Hard Place; Super-SIV Now Super Sieve; What's In Your Wallet? Capital None; Polo Mallet Meets Polo Wallet
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street.
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Hey, China Takin' Cheapshot at Our Foldin' Money
Overnight the dollar fell to a record low versus the euro and its weakest level 1981 against the pound after Cheng Siwei, vice chairman of China's National People's Congress, China's legislature, told a conference in Beijing, "We will favor stronger currencies over weaker ones, and will readjust accordingly."
- Cheng suggested that China should look to strong currencies to offset the effect of weak currencies.
- The only problem is Cheng, a member of the National People's Congress, has nothing to do with setting currency policy.
- According to Bloomberg, when speaking to reporters after the conference Cheng backtracked on his comments, saying they don't mean China will buy more euros.
- What may have spooked currency markets more are comments from Xu Jian, a central bank vice director, who said at the same meeting that the dollar is "losing its status as the world currency."
- The dollar's weakness leads us to today's Number Two...
2. ECB Facing the Fed's Familiar Spot Between Rock, Hard Place
The Euro at a record level against the dollar, oil near $100 a barrel, severe credit issues that remain unsolved and worries about inflation in the European Union have thrown what was to be a run-of-the-mill interest rate policy meeting into sudden disarray.
- For European Central Bank President Jean-Claude Trichet, the view ahead of tomorrow's interest rate policy meeting is squarely trained on the rock and hard place so familiar to the U.S. Federal Reserve.
- Consumer prices in the euro zone rose 2.6% last month, the biggest increase since September 2005.
- The ECB's target rate for inflation is closer to 2%.
- ECB governor Axel Weber, head of the German central bank, last week warned that "increases in the prices of food and energy will push inflation clearly above the limit in Germany and the eurozone by the end of the year."
- Meanwhile, with the U.S. Federal Reserve having recently cut rates, and Fed Futures suggesting a still better than even money chance they cut another 25 basis points in December, some inside the Euro Union are worried about potential rate hikes.
3. Super-SIV Now Super Sieve
The Financial Times this morning is reporting that a US Treasury-backed plan for a "superfund" to buy up distressed mortgage securities appears to have stalled.
- Back in September the US Treasury jumped behind a proposal by Citigroup (C), Bank of America (BAC) and JP Morgan (JPM) to set up a $75 billion "superfund" to buy securities from cash-strapped structured investment vehicles (SIV's).
- However, the lack of support from additional banks has stalled the plan and is threatening its implementation, the FT said.
- The newspaper cites the turmoil at Citigroup as the primary reason the plan has faltered.
- Citigroup manages SIVs with about $80 billion in assets.
- The failure to launch the Super-SIV would be the forced selling of mortgage-backed securities at deeply distressed prices.
- That in turn could create a ripple effect throughout the street since the sales would then become "observable inputs" and under the FASB 157 change could force additional writedowns sooner rather than later.
- Jamie Dimon, chief executive of JP Morgan (JPM) this morning said the Super-SIV is a "very complex issue," adding that "there are a lot of people working on it."
4. What's In Your Wallet? Capital None
Consistent with the thesis that credit cards are being used as a lending source of last resort for many consumers, Capital One (COF) yesterday released some disturbing news in their 8-K filing.
- During the webcast, Chief Risk Officer, Peter Schnall, provided an update to the Company's 2008 credit outlook.
"In the third quarter earnings call, we provided a view of fourth quarter 2007 and full year 2008 credit losses based on the delinquency trends we saw in our portfolio at the time. We said we'd see $1.2 billion in charge-offs in the fourth quarter and $4.9 billion in 2008 including an "extra" $175 million in the first quarter of 2008.
We based that view on the delinquency trends we saw at the time and limited speculation about the future course of the economy. Importantly, we quantified the combined impact of:
- The full year effects of credit normalization,
- The continued seasoning of our dealer prime auto portfolio,
- The sharp degradation in our small alt-A HELOC portfolio from Greenpoint,
- The continued increase in bankruptcies,
- The effects of our changes in loan mix,
- The one-time effects of moving to a 25 day grace period,
- And other increases in delinquency that we assumed were temporary.
There were two key effects we didn't quantify. We didn't quantify the uncertainty associated with our elevated delinquencies and we didn't quantify the potential if the housing market were to continue to degrade. Today, we're adding a range to our 2008 charge-off outlook that reflects those two factors."
- Bottom line: COF is updating its view of 2008 charge-offs to a range of $4.9 billion on the bottom and up to mid-$5 billion.
- Schnall added: "Fourth quarter delinquencies are unlikely to decline the way we had assumed, and consequently, the $175 million of "extra" charge-offs we anticipated in the first quarter are likely to continue into the beginning of the second quarter and possibly longer."
5. Polo Mallet Meets Polo Wallet
Polo Ralph Lauren (RL) reported second-quarter profit that exceeded analysts' estimates on faster sales growth to department stores. But...
- But the company cut its full-year forecast for the third time this year, most recently because it believes consumer spending will slow.
- Revenue rose 11% to $1.3 billion, topping analysts' estimates.
- And sales to department stores rose 17% , helped by an acquisition.
- But at its own stores, sales gained just 7%, less than half last year's rate.
- The company on Aug. 8 reduced its per-share profit forecast for the year ending in 2008 to $3.64 to $3.74 to reflect a higher tax rate.
- On May 30, it cut its prediction to $3.70 to $3.80, including expenses of 27 cents a share for acquisitions.
- "As we assess our outlook for the second half of the year, it is with a more conservative view of discretionary spending among U.S. consumers,'' President Roger Farah said in the company's statement.
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