Bond yields drop for Italy and Spain but Greece moves ever closer to leaving the euro

Spain and Italy stepped back from the brink today but Greece moved closer to the edge. (Which, of course, means that Spain and Italy moved closer to the edge too, I think.)

Just another day at the office in the euro debt crisis.

Good news first. Spain sold twice as many bonds at auction today than it had targeted and at a much-improved rate. The country sold $13 billion in bonds and the three-year note priced to yield 3.384%.  At the December auction the notes priced to yield 5.187%. (Just for reference and so we don’t get carried away a five-year U.S. Treasury yields 0.82%.)

Italy did even better on the yield front at its auction. The country sold $15 billion in bills. The yield on the one-year bill was just 2.735%. On December 12 the bills of this maturity were priced to yield 5.952%.

After the auction the yield on Spain’s benchmark 10-year bond dropped 0.2 percentage points to 5.13% and the yield on the 10-year Italian bond dropped 0.35 percentage points to 6.63%. That pulled both countries further back from the 7% yield that suggests a bailout is just around the corner.

I’d suggest that this is quite probably a temporary respite since both Spain and Italy are slipping into a recession (if they aren’t already in one) that will add to their budget deficits and undo much of the progress toward reducing those deficits that they have made in the last week or so.

But still temporary or not, Italy and Spain are seeing progress. Greece, on the other hand, is in danger of seeing even its precarious current stability unravel. Read more

Inflation at the consumer level fell to a 15-month low in December, China’s National Bureau of Statistics announced today. Inflation at the producer level fell to the lowest rate in two years.

The path to another cut by the People’s Bank of China in the now bank reserve requirement before the Lunar New Year holiday is now wide open. In December China’s central bank reduced its record-high reserve requirement ratio for the first time since 2008.

Consumer prices rose in December at 4.1% annual rate. That was down from a 4.2% rate in November and just slightly above the 4% median estimate from 26 economists surveyed by Bloomberg. For all of 2011 inflation grew at a 5.4% rate, well above the government’s target of 4%.

I think we’re still months away from an actual cut to interest rates though. The Lunar New Year holiday usually produces a brief tick upward in inflation due to increased consumer spending (and reduced industrial production) before the holiday. Weather has produced some disruption to food supplies and that pushed food prices up at an annual rate of 9.1% in December.

The timing of any interest rate cuts—and any decision on the number of cuts in bank reserve requirements—will be heavily influenced by the growth rate for China’s economy in the fourth quarter. Economists now expect that government data set to be released on January 17 will show that the economy’s growth rate slowed to 8.7% in the fourth quarter. That would continue a pattern of declining growth in 2011 that has seen annual growth slip from 9.7% in the first quarter to 9.5% in the second quarter to 9.1% in the third quarter as the Beijing government fought to slow the economy to reduce the inflation rate.

A reading of 8.7% for the fourth quarter would keep China on track to a bottom near 8% in the second quarter of 2012 and probably wouldn’t cause the People’s Bank of China to consider speeding up the first interest rate cuts from, I speculate here, June or July.

Anything much below 8.7%, though, will get the bank’s attention.

Sell Coach (COH)

Bad news for the entire luxury retail sector from Tiffany & Co. (TIF) yesterday in the company’s update of holiday sales.

I’d look to cut my short-term exposure to the sector—and that includes shares of companies such as Coach (COH) that aren’t luxury retailers in the United States but are in their fastest growing market, China.

As of today January 11, I’m selling Coach out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ with a gain of 80.47% since I added to that portfolio on November 20, 2009.

At Tiffany same-store sales in the first two months of the fourth quarter—adjusted for currency—fell by 4% in Europe and grew by a meager 2% in North America. That compares to 6% growth in Europe and 15% in North America in the third quarter.

Disappointing but nothing unexpected in sales numbers from these two regions. Sales growth had been expected to slow and sales in Europe had been expected to decline.

The surprise, and the reason I’d lighten up on the whole sector right now, came from Asia. Read more

Brazil’s economy looks to be in better shape—and a quarter or two ahead—of China’s. The big question is Can Brazilian stocks move up even if China’s markets continue to lag?

A January 6 survey by the Banco Central do Brasil published on January 9 showed economists cutting their forecast for inflation in Brazil for the sixth consecutive week. Economists now forecast that inflation will climb by 5.31% in 2012.

That’s only a tiny drop from the 5.32% forecast of the week before but it keeps the trend pointing downward. It comes on the heels of a surprisingly low inflation reading in December that pushed inflation for 2011 just below the top of the bank’s target range of 4.5% plus or minus two percentage points. It was the first time in 9 months that inflation came in below the top of the bank’s target range and it let the central bank squeak through the end of 2011 without having to impose any new restrictions on an economy that has seen growth slow to 2.9% in 2011 from 7.5% in 2010.

This all leaves the central bank free to continue the policy of interest rate cuts that it began in August. At that time inflation was running above the central bank’s target. The bank took considerable criticism for cutting rates based on a projection that inflation would end 2011 below the top of its target range.

With the most recent news on inflation economists now expect the central bank to cut interest rates another 0.5 percentage points to 10.5% at their January 17 to 18 meeting, and to 9.5% by the end of the year. That should be enough, economists now project, to send Brazil’s growth rate for 2012 back up to 3.3%.

Not a huge improvement from 2011 but even that slight acceleration to 3.3% would indicate that Brazil’s growth rate has bottomed and that we were looking at the upward part of the cycle.

All this should sound familiar to readers of my recent posts on when to invest in China. What I’m looking for in that market is evidence that China’s slowdown has bottomed—so that the trend is upward from there. One precondition for that bottom, I’ve said, is an actual interest rate cut from the People’s Bank of China. That might come as early as June, I estimate.

In Brazil we’ve already got the interest rate cuts—beginning in August 2011—we’ve got evidence in actual numbers that inflation is falling enough to keep the interest rate reductions coming—and it looks like Brazil’s GDP might begin to accelerate, modestly, from the 2.9% growth of 2011 maybe as early as the first quarter or 2011.

Does that mean you should put money into Brazil now? Or should you wait until the turn in China is clear? Read more

Sell Walt Disney (DIS)

Walt Disney’s (DIS) movie business didn’t look like it was going to turn in a stunning 2011 before, but now the well-publicized troubles of the movie studios marketing president M T Carney—a Hollywood Reporter piece on January 10 quoted her departure e-mail–is drawing new attention to just how bad the first half of calendar 2012 could be for a business that accounts for 16% of the company’s revenue.

Revenue at the studio entertainment division is forecast to rise just 4% in fiscal 2012, according to Credit Suisse. That comes after a fiscal 2011 when operating income dropped by 11%.

But that performance in fiscal 2011 could wind up looking like the good old days and the projections for fiscal 2012 could turn out to be optimistic. Read more