Trader Talk

It's the ECB's Turn to Step Up

The yield on Italian 10-year debt skyrocketed overnight, going from roughly 6.7 percent yesterday to 7.3 percent. And that is with the European Central Bank (ECB) buying Italian bonds — in fact there has been active speculation that they are almost the only buyer of those bonds.

The Italians will hold auctions of one year bills on Thursday and longer term bonds on Monday, Nov. 14.

This has effectively torpedoed the European Financial Stability Facility (EFSF). Plans to use the EFSF to lend directly to Italy are unlikely to happen now, and even a plan for the EFSF to absorb initial losses from bond buyers is unlikely to happen because no one is going to buy even with the insurance guarantees.

We thus go back to the endgame. The ECB will be forced in as a buyer of last resort, in a big way. Italy will become a ward of the ECB until there are elections and serious economic reforms are implemented. And don't look to the International Monetary Fund , at least not in its present form: It has some 280 billion euros ($381 billion), but last week there seemed to be little interest in increasing its firepower. Expect that to change as conditions deteriorate.

French President Nicolas Sarkozy appears to have laid the groundwork for the breakup of the euro. Yesterday Sarkozy proposed a "two-speed" Europe where the euro zone countries would accelerate political and economic integration, while another group outside the currency block would be more loosely connected. While this sounds like the current euro zone and the European Union, it's unlikely that's what he ultimately meant: He has already said allowing Greece into the euro was a mistake. ?


1. Cooking the books, in Japanese. Revelation that Japanese camera giant Olympus was cooking its books was a major topic at a Market Technicians Association forum I chaired last night. Olympus admitted that it cooked its books to mask losses on investments made many years ago. They apparently invested in off-book schemes that turned sour and then attempted to hide the losses. This is not the Chinese investing in U.S. shell companies in reverse-merger schemes. This is a global icon brand.

2. The weakness in Europe is starting to show up in corporate profits: General Motors delivered a solid quarter, beating Street estimates ($1.03 a share vs. 96 cents a share consensus), but cut its outlook in Europe. Revenues were in line with estimates, as North America and Asia business was solid and market share in those areas grew.

GM, of course, is still owned 32 percent by U.S. taxpayers. They emerged from bankruptcy protection in 2009 after taxpayers shelled out $52 billion to bail it out.

GM has a lot of value investors cheering for it. One wrote to me after the earnings: "GM has 34 billion in cash and could pay their pension liability of probably 9 billion out of petty cash. They have almost no debt and have eliminated all bad assets and obligations in bankruptcy. They are making billions in this environment and have all their good models coming out in 2012 when margins will expand. If things improve they will be making so much money they will buy the govt stake back and pay huge dividends. The bad press it gets because of govt bailout is amazing."

3. Despite stronger-than-expected performance in the latest quarter, murkier outlooks are weighing on a few stocks this morning:

a) Macy’s falls 4 percent despite blowing away third-quarter profit estimates (32 cents a share vs. 16 cents a share consensus) amid a 4 percent rise in same-store sales. The problem for its stock — the department store’s fourth-quarter outlook disappoints. Earnings for the current quarter are seen between $1.52 a share to $1.57 a share, far below consensus of $1.66 a share.

b) Polo Ralph Lauren falls 6 percent, despite beating estimates ($2.46 a share vs. $2.24 a share consensus). Although revenues are seen growing at a low teens rate in the current quarter, that’s below estimates of 19 percent growth. Additionally, margins are expected to be squeezed (falling by 300 basis points), hurt by soaring commodity costs.

4. Anheuser Busch InBev falls 1 percent tops estimate $1.09 a share vs. 94 cents a share consensus. Revenues grew more than expected despite lower beer volumes. Even though volumes slumped in Europe and Russia and market share declined in the U.S., performance was more encouraging in its Brazil, Argentina, and China markets, where volumes grew.

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