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Durable Goods: An Outlier or an Omen?

manufacturing engineering
manufacturing engineering

An outlier: S&P futures dropped 6 points as January durable goods orders dropped 4 percent, much bigger than the 1.1 percent expected; ex-transportation down 3.2 percent, also worse than expected.

Will it get revised next month? The headline number was lowest since January 2009. Some blamed it on the expiration of the 100 percent depreciation expense tax benefit...it’s now only 50 percent, so businesses may have pulled purchases forward in December.

Another successful Italian bond auction: Italy sold 3.75 billion ($5 billion) euros of 10-year paper at 5.5 percent, well below the more than 6 percent it sold last month, and 2.5 billion euros ($3.4 billion) of five-year paper at 4.2 percent.

Markets are now gearing up for the second three-year European Central Bank long-term refinancing operation (LTRO), which will be announced tomorrow. Some 489 billion euros ($657 billion) were borrowed at 1 percent during the last three-year operation in December.

Many are expecting banks to borrow anywhere from 400 billion to 1 trillion euros ($537 billion to $1.3 trillion).

What do they do with this money? They can:

1) rollover existing debt;

2) play the carry the trade and buy government debt;

3) lend it out; and/or

4) just sit on it.

Banks did buy government debt: Data released yesterday by the ECB indicated that Italian and Spanish banks purchased a record amount of government debt in January. Over December and January, Italian banks increased their sovereign debt holdings by 13 percent, Spanish banks by 29 percent.

Did they lend any money? ECB data indicated that the flow of bank loans dropped $1 billion in January compared to the prior month, but in December loans were down $35 billion. So there is some indication it slowed the decline in lending, but it hasn't contributed to an increase in lending.

Has all this liquidity helped? Consider:

1) The euro is near a three-month high against the dollar;

2) The Italian 10-year yield is at 5.338 percent, the lowest since Sept. 8;

3) euro zone bank shares are up 10 percent or more since December;

4) the ECB has bought no sovereign bonds for the last two weeks; and

5) while the euro zone economy remains mired in what appears to be a recession , confidence in the euro zone’s economy rose for a second consecutive month in February.

So how do we judge if the auction is successful? Is a takeup of 400 billion euros good, or 800 billion euros?

My own feeling is that, given that the ECB’s body language is that this will likely be the last three-year auction for some time, it makes some sense for banks to take as much as they think is prudent, particularly for southern European banks.

Think about it: You are an Italian, Spanish, or Portugese bank, and you have the opportunity to secure a stable source of funding at least through 2012 — and, depending on your needs, into 2013 — would you do so? Given how unpredictable things can be, and the amount and quality of collateral the ECB is willing to accept, a larger takeup would seem more desirable.

Elsewhere:

1) Leon Cooperman sat in on our new set last night with Maria Bartiromo and said he liked stocks because: 1) the U.S. economy was slowly improving; and 2) stocks are still inexpensive compared with other asset classes. He noted that when the S&P 500 was at its current earnings multiple of roughly 13.5, the yield on the 10-year Treasury note historically averaged 6.6 percent; today it is below 2 percent.

When asked about crude oil and its effect on the U.S. economy, he said Brent crude (currently at $122 a barrel) could go into the $130s before it had an adverse effect.

2) Tenet Healthcare shares drop 3.9 percent pre-open after the hospital chain swung to a fourth-quarter net loss on debt-related costs. Excluding items, Tenet posted a quarterly profit of $0.10 a share, compared to analysts’ $0.14 expectation, due to modestly higher admissions and improved terms with managed-care payers. Admissions edged up 0.3 percent, up 1.3 percent on an adjusted basis, and net patient revenue per adjusted admission rose 2.3 percent on better terms with managed-care payers. Tenet raised its 2012 outlook for adjusted EBITDA to between $1.225 billion and $1.350 billion.

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