Wednesday, May 16, 2012

Greece inspired worries continue to dominate the headlines again, trying hard to divert the market’s attention from a strong Housing Starts reading and better than expected results from Deere (DE) and Target (TGT). The Greek society has endured a lot over the last two years, but the coming election next, which will effectively be a referendum on the country’s position in the union, has the potential of pushing them truly into uncharted territory.

Contagion fears have spiked as the odds of a Greek exit from the currency union have increased. Yield on the benchmark 10-year Spanish government bond has jumped since the Greek election to 6.4% from 5.7%, reflecting such concerns. In addition to the government bond market, bank deposits are another direct channel through which contagion fears are spreading. We don’t have much data on trends in Spanish bank deposits yet, but Greek banks appear to be losing depositors at a disconcertingly faster pace.

The European Central Bank’s announcement that it will not pull funding from Greek banks is helpful, but may not be enough to restore confidence at this stage. But I don’t think Euro-zone leaders are worrying much about Greece at this stage. Their goal is protect Spain and it is far from clear at this stage if they have the ability to ring-fence that country from the gathering storm.

If only the market will stop fretting about Europe that much and start paying more attention to developments on the domestic economic front, we will have a lot more green arrows on our screens. This morning’s better than expected Housing data will provide it with one such opportunity. We also have Industrial Production and minutes of the Fed’s last meeting on tap for release a little later.

The April Housing Starts data this morning came in better than expected, with positive revisions to prior data reversing the weak reading from the month before. Housing Starts increased by a better than expected 2.5% to 717K annualized pace in April from March’s upwardly revised 699K level (originally reported at 654K). Housing Permits were down 7% after the strong 8.8% gain March. The Starts decline was not unexpected particularly following the gains in March. But the breadth of improvement on the Starts front is particularly notable, as the gains were not restricted to the multi-family segment as had been the case in recent months, but are also showing up in single-family homes. Perhaps allthe talk of a housing bottom may not be without a basis given these numbers. 

On the earnings front, we got solid earnings beats from Target and Deere & Company this morning. J.C. Penney (JCP), was not that lucky in its results after the close on Tuesday, as it came out with a terrible report. Management suspended the quarterly dividend and withdrew previous guidance, indicating that the restructuring effort has failed to show any results.

Sheraz Mian
Director of Research