Royal Bank of Scotland Puts a Scare into the Market?

As we always say the news flow is really not that much different week to week, or month to month - it's just what the market wishes to ignore and what the market wishes to recognize. We've seen some high profile earnings blowups this week in smaller stocks, and the creep of inflation is starting to hit some other names, ala Fedex (FDX) a name we've always used as an economic tell.

• FedEx Corp. reported a fourth-quarter loss Wednesday and offered a gloomy outlook as it wrestles with a slumping U.S. economy beset by soaring fuel costs and falling prices for homes.
• FedEx, considered a bellwether for the broader U.S. economy, predicted 2009 earnings of $4.75 to $5.25 per share, well below Wall Street expectations of $5.92 a share.
• "Looking ahead to '09, we do expect conditions to remain extremely challenging and we anticipate in both the first quarter guidance and the yearly target the current economic weakness will continue and the current level of fuel costs will not mitigate," chief financial officer Alan Graf said in a conference call with market analysts.
• FedEx customers pay fuel surcharges, but that does not cover all of the increases. The company's fuel costs for the quarter were 54 percent higher than for the same period last year, Ortwerth said, while the surcharges were up less than 30 percent. The fuel surcharges, which are added to the company's basic shipping rates, were 28 percent for June and will increase to 32.5 percent in July, Hatfield said. (no inflation there)
  

But frankly Fedex has warned (multiple times) in the past few quarters, and other than a 1 day blip the market didn't care most of the time - after all it was "backward looking" and "the 2nd half recovery is imminent". As I said almost every day of the "1st half", the "2nd half recovery" is a bowl of Kool Aid wrapped in an enigma of nonsense ... or something like that. I simply await the calls for "1st half 2009 recovery" that are sure to be the Kool Aid of choice soon, offered to you by the same people who last fall were offering the "1st half 2008 recovery". Of COURSE you should be buying NOW to take advantage of the recovery in early 2009 since the market is forward looking. Oh yes, those comments are only from the people who acknowledge there is any slowdown at all - many still cling to the government reports which show "no technical recession".

I'll keep repeating this until I'm blue in the (?) fingertips - inflation is a tax on all things - producers and consumers. Someone needs to eat it. Uncle Ben won't be killing inflation by "words" (which CNBC will get in a froth about next week when "strong language" that shows "the Federal Reserve is serious about fighting inflation" comes in the statement - that is so laughable but it will be told to you) And unless producers can pass it all along to consumers - they will be eating a lot of it and their profit margins will be hampered. This was plainly obvious to anyone who does not use government inflation reports... but since almost all of Wall Street clings to those as "truth", as these earnings reports begin to trickle out this quarter and next showcasing inflation is actually a real thing, and earnings are being crunched, stocks will react like wise. And it will make the typical mine field of earnings season that much worse since expectations are so unrealistic. Again folks, I cannot stress what a crime "2nd half" earnings estimates are - as a whole analysts say fourth quarter 2008 is going to grow 60% year over year, over fourth quarter 2007. Second half recovery and all.

Did I mention the whole housing debacle? And credit market debacle? I know, I know - that's all in the past - look forward young man, it will all be fixed in the grandeur of the 2nd half recovery.... Royal Bank of Scotland seems to disagree....

• The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
• A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets. Such a slide on world bourses would amount to one of the worst bear markets over the last century.
• "Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
• "Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.
• US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit. The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. (oh yes they can, in fact they HAVE in the United States of Subprime - so please don't put the Fed in the same sentence with the ECB who have approached this issue from completely different angles)
  
• "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said. (that's what I've been saying for a long while now)
  
• "The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.
• Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.
• Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year. (I have to agree with that one as well)

What does Morgan Stanley think? Not such great things either. Would someone please pass long some of this data to the pundits clapping like seals to "buy stocks, they're cheap and everything is fine!"

• The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.
• "We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.
• Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, (that's how we solve everything, print more wortheless US pesos and make sure the fat cats get bailed out from their stupidity - then we wonder why the fat cats do the same stupidity every 6-8 years) while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.
• The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.

The news is really not every different than it has been for months... most of the past year really. But the market is ever hopeful - always trying to pounce on every sliver of data to reassure themselves that it is time to buy. Instead of taking 10 steps back and looking at a quite dark big picture. Because that would require actual thinking and analytical ability. Instead of just being hand fed data from the government about how everything is just fine, thank you. The Plunge Protection Team could be in store for a very busy summer and fall....

Conclusion: This is all priced in and setting up beautifully for that 2nd half recovery to start in 2 weeks. Drink Kool Aid, and buy stocks. Everything will be fine soon.