The weakening U.S. dollar's mirror image is the strengthening euro and that has some people concerned about European stocks and the dollar derived earnings of European companies. One of those people would be CNBC's Jim Cramer, who says its time to take profits out of Europe now. Not too long ago, Cramer was very bullish on Europe, especially France, when Nikolas Sarkozy was elected president amid promises of economic reform.
"Its the currency. They have to cut rates," Cramer said. The European Central Bank, meanwhile, has a rate decision Thursday morning but it is widely expected it will not take action. The Bank of England also has a rate decision in the morning.
"There's a huge gain, just take it," Cramer said of stock markets in France and Germany. Germany's DAX closed today at 7955, up 20% year-to-date and up 23.4% from its 2007 closing low of 6447 on March 14. France's Cac-40 closed today at 5806 and it is up 4.8% year-to-date and 10.3% from its 2007 low on Aug. 16.
"Tate and Lyle was a wakeup call," says Cramer. U.K. sugar producer Tate and Lyle last week saw its stock take a wicked beating after it warned it would post a loss. One of the culprits contributing to the weakness was the slumping U.S. dollar and that started a lot of buzz about the earnings of European companies. The dollar was higher Wednesday, finishing at $1.4091 per euro, but it has lost about 7% against the euro year-to-date.
CNBC's Rick Santelli said sentiment on Europe took a dip this morning when Europe's version of ISM was released. "The European ISM had its worst drop ever on record. Their service sector was clocked there. It came out earlier than ours and it was extremely weak. It moved from 59.8 to 53.1,.a 6.7 point drop, the largest on record," said Santelli.
There's been some buzz around the European Central Bank as we move closer to the G7's mid-October meeting. Earlier this week, ECB President Jean-Claude Trichet commented on the strong dollar policy of the U.S., raising speculation the G-7 would make some currency related statement at its meeting. Santelli says traders are talking about a currency play of selling euros and buying dollars ahead of that meeting.
Early today, Barings issued a note cautioning investors on Europe and also the U.S. It held up emerging Asia as the place to overweight. The impact of the U.S. housing slowdown will intensify and in Europe, the consumer is slowing, the currency is a complication for exporters and "interest rates are fairly stubborn," says Hayes Miller, Barings, Investment Manager - Asset Allocation.
"I think to be really more precise about our position, we have felt until last month that U.S. investors should be overweight Europe because it provided equivalent type returns for better value, but now we've taken the view there's not much distinction between European and U.S. equities. So now it matters more what you're investing in in western markets," said Miller.
Swirl Around Merrill
Two high level executives exited Merrill Lynch today amid a storm of speculation that they have left some big fixed income losses in their wake. Merrill has not yet provided details on its exposure to credit issues and subprime related losses.
Merrill today confirmed that Osman Semerci is leaving as head of global Fixed Income, Currencies and Commodities. Also departing is Dale Lattanzio, head of structured credit products, the firm said.
Semerci is being replaced by David Sobotka, who had been head of global commodities. Merrill would not comment on why the two executives are leaving but market speculation is that Merrill is taking a writedown from losses in the fixed income division.
"We're in a quiet period, and we can't talk it about," said a spokeswoman. Merrill would not say whether any other executives are leaving but a source says Semerci and Lattanzio are the only two.
A note issued last week by Goldman Sachs analysts on Merril Lynch's earnings carried some of the same speculation making the rounds on Wall Street today. The research note was headlined "Perfect storm has MER squarely in its sights; lowering estimates." Goldman, at the time, chopped q3 and 2007 estimates to $0.15/$6.75 from $1.95/$9.05.
Goldman says its estimates include a multi-billion dollar writedown due to weakness in mortgages, leveraged loans and CDOs. Goldman says it is also marginally lowering its 2008-2009 estimates and cutting its price target to $94 from $108.
The firm also said Merrill was caught in the cross hairs of leveraged loan losses, mark to market losses on CDO exposure and deteriorating mortgage fundamentals. Goldman estimated a $1.5 billion loss in Merrill's Fixed Income Currencies and Commodities business, likely to include multi-billion dollar write downs and losses.
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