Ahead of Wall Street - June 8, 2012


Friday, June 8, 2012

There are mixed headlines out of Europe today, with growing indications of some sort of a rescue for Spain’s banks in the works and economic data out of Germany indicating that the Euro-zone’s economic turmoil is starting to weigh on demand for the country’s exports. The news flow on the home front is on the light side today, though the shrinking April trade deficit number was a tad wider than expected.

Today’s trading action will likely reflect continuation of the momentum from the late-Thursday session when stocks gave back all of the earlier gains. There has been little fundamentals support for the positive move in the market this week and this realization appears to be finally sinking in. The issues that caused the stock market rally to peter out in early April – Greece, Spain’s banks, and U.S. growth outlook – still remain largely unaddressed.

While the prospect of a potential German slowdown is no doubt bad news for the Euro-zone, it is no surprise for many who expected the region’s problems to eventually seep into the core. But the movement on the Spanish banks front appears promising as it could potentially ring-fence the country’s financial sector ahead of the Greek elections later this month.

The plan appears to be that Spain will get some sort of a bailout-llite where the country’s banks will directly get capital injections from the Euro-zone bailout fund without subjecting the country to onerous stipulations that accompanied the earlier bailouts of Greece, Ireland, and Portugal. A lot of details apparently still need to be worked out, as the IMF and an outside consulting firm are evaluating the full extent of Spanish banking sector’s loan-loss provisioning needs. But of all the ideas floating around, this seems the most promising to tackle the issue.

In corporate news, The founder of Best Buy (BBY), Richard Shulze, is resigning from the company’s board and reportedly exploring options for his roughly 20% stake in the company. It is unclear whether Mr. Shulze plans to sell his stake outright or use it as launching pad to take the beleaguered retailer private. Strong competition from Amazon (AMZN) and other online retailers has raised questions about the long-term sustainability of the big-box electronics retailer. In other news, McGraw-Hill (MHP) is reportedly the sole remaining bidder for oil and gas data researcher Wood Mckenzie, which has had a for-sale sign for some time now. The move would make sense for McGraw-Hill as the purchase would give its energy data-centric Platts division greater scale and industry coverage.

Sheraz Mian
Director of Research

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