What’s the Story?

by CC February 22, 2012 9:07 am • Commentary


Stock futures declined Wednesday, following weak economic data from the euro zone and amid ongoing concerns over the region’s debt crisis.

A weak economic report from of China also added to negative sentiment. China’s manufacturing sector contracted for the fourth month in a row in February. In the euro zone, data showed the region’s service sector shrank unexpectedly.

The Obama administration will propose slashing the top corporate tax rate from 35 percent to 28 percent, as part of a tax reform plan set to be announced later on Wednesday.

At 10 am, the National Association of Realtors will release existing home sales data for January. Reuters analysts forecast a 4.65 million annualized unit total, versus 4.61 million in December.



Brocade Communications Systems Inc. BRCD +5.82%   shares rose 8.1% a day after the network-gear maker reported better-than-anticipated quarterly results.

Garmin Ltd. GRMN +11.21%   U.S.-listed shares advanced 13% after the Swiss maker of personal-navigation devices reported fourth-quarter revenue above analysts’ estimates.

Sourcefire Inc. FIRE +13.40%   shares climbed 14% after the security-software provider late Tuesday reported fourth-quarter results that topped expectations.


Brightpoint Inc. CELL -7.50%  shares declined 5.5% after the mobile-phone wholesaler cut its 2012 earnings outlook.

Dell Inc. DELL -6.59%  shares fell 6.7% a day after the personal-computer maker projected fiscal first-quarter revenue below Wall Street’s expectations and Citigroup downgraded its shares to neutral from buy.

Newfield Exploration Co. NFX -6.51%  shares fell 6.7% after Citigroup downgraded the oil-and-gas company to neutral from buy.


Stocks to Watch

Among the companies whose shares are expected to actively trade in Wednesday’s session are Dell Inc. (DELL), Yingli Green Energy Holding Co. (YGE) and Cheesecake Factory Inc. (CAKE).

Dell’s fiscal fourth-quarter earnings fell 18% as the computer maker saw revenue from the consumer segment continue to fall and operating expenses rise. Shares slid 5.1% to $17.29 after hours as the company’s adjusted profit missed analyst expectations and it also issued a downbeat revenue view for the current quarter.

Yingli Green Energy lowered its forecast for fourth-quarter shipments and gross margins, as the solar-panel maker also said it will record impairment charges and an inventory provision amid difficult solar-market conditions. Shares dropped 8.5% to $4.40 in after-hours trading.

Cheesecake Factory’s fourth-quarter earnings rose 37% on strong guest traffic and an extra week of sales. Shares still dropped 5% to $30 after hours as the company’s cautious outlook for slower new-restaurant growth seemed to disappoint investors.

Overnight Headlines (Links)

A Better Grecian Bailout

Should Mortgage Rates Even Be Lower?Toll Brothers Moves Back to Living LargeCurrency Market in Quiet Mode

Obama Proposes Revamp to Taxes

Europe Business Activity Shrinks

Heard on the Street: Contemplating Life After FrannieThe Time Isn’t Now for Groupon


Peugeot, GM in Talks on Possible Alliance

Citigroup Faces Smith Barney Hit

Anheuser Considers Bid for StarBev

AT&T’s Chief Pays for Big Deal’s Failure

Deal Boosts CME’s Bet on Dubai

TNT Express Delivers Unconvincing Defense


Existing home sales for January. Economists think resales were little changed last month. The median forecast says 4.65 million homes were sold, up slightly from the annual rate of 4.61 million in December.

Key Earnings

  • Aegean Marine
  • Analog Devices
  • Angie’s List
  • Avago Tech
  • Boston Beer
  • Chico’s
  • Cinemark
  • Concho Resources
  • Continental Resources
  • Dollar Tree
  • Donaldson
  • Eaton Vance
  • Express Scripts
  • Flowserve
  • Fluor
  • Garmin
  • Golden Star Resources
  • Healthcare Realty Trust
  • Heico
  • Hertz
  • Hewlett-Packard
  • Jack in the Box
  • KBR
  • Lamar Advertising
  • Liberty Global
  • Limited Brands
  • MGM Resorts
  • Oasis Petroleum
  • Pan American Silver
  • Polypore
  • Quanta Resources
  • QEP Resources
  • R.R. Donnelley
  • Roger Communications
  • SM Energy
  • Synopsys
  • TJX
  • Toll Brothers
  • Whiting Petroleum
  • Williams
  • Williams Partners
  • Windstream
  • Yamana Gold
  • Zale

Credit Writedowns

But what about Greece itself? Logic suggests that they will be unable to meet the terms of their new agreement, and that we will soon be back to where we started, or will we.

Feelings that what we are seeing today will only be a short interlude are based on a combination of three factors: a) a recognition that even a reduction of debt to GDP to 120% by 2020 may well not be sustainable; b) a recognition that after the formal bailout is awarded there will still be ongoing programme reviews, and the country will struggle to comply with the conditions; and c) the fact that the implementation of the Private Sector Involvement debt swap will probably mean changing the jurisdiction under which Greek debt is denominated from mainly Greek law in the majority to international law in the totality. This latter point is undoubtedly the most important, although being able to grasp its full implications implies an understanding of the first two.

Essentially, if the unsustainability of the Greek debt path and the inability to comply with conditionality are accepted, then a further default will be inevitable, but such a default will undoubtedly be a very, very hard one, and most likely an uncontrolled one. In the first place if the country were to leave the Euro after the debt swap, then the new Greek bonds could not be converted to New Drachma (or equivalent) by a weekend session of the Greek parliament, and the country would have to default on bonds denominated in Euros, which would presented them with all kinds of problems.

Secondly, given the terms of the debt swap, and the condition of an escrow fund to protect the interests of private bondholders, then the only liabilities on which the country could still default would be those commitments it has with the official sector, which means defaulting on the IMF, the ECB, the EU and Germany. These would not be especially nice people for the country to default on, since if Greek reaches such a point the country would almost surely be made an example of, which means effectively establishing a pariah state.

The EU certainly wouldn’t be sending in the social workers and psychologists to help them cope with this massive tragedy, which also implies that investors generally would be inclined to steer clear. Realising this, and having taken the decision not to default now, short of seeking allies among other rogue states (the North Korea path) the country’s leaders have probably taken the decision to stay in as long as they can. But then it is worth remembering the old Greek saying that “whom the gods would destroy, they first make mad”, by which I mean we could well see extreme factors at play in Greek politics – the extreme right, the extreme left, and the military – before they then all go rolling off the cliff together.

Or maybe Greece will decide to default and stay in the Euro, printing its own Euros at the national central bank along the lines of the Emergency Liquidity Assistance precedent. That would surely create a mighty mess, (they could even carry out the internal devaluation by subsidising Greek wages) and would leave the onus of kicking them out on their European partners.

Whichever the appointed path, such a scenario would have important geopolitical implications, since surely the EU could not let Greece become a nice place, given that then Portugal would immediately say “I want one of those”, and so on and so forth along the daisy chain. In the meantime private capital will be steadily forced out of periphery sovereigns like Spain and Italy, and the ECB will ultimately have to provide. But we have already crossed the Rubicon on this, and there is no real turning back. Ongoing debt restructuring will continue, as none of the really troubled economies can either grow or sustain their existing debt. I mean, who can now really believe that Spain won’t be asked in six months time to prepare another set of reforms (the latest batch have “destined to fail” written all over them), and six months later another one, and so on, until eventually the country is where Greece is now?

And if the private sector either can’t, or won’t accept the degree of involvement being asked of it, then the ECB will be taken out of the official sector, and somehow or other find a way to swallow the losses. At least that’s the way things could work for the time being.