Friday, October 30, 2009

Morning Note...

Futures -45bps on a relatively quiet morning. It appears that this week’s major event – the Q3 GDP release – has passed, and thus markets are settling in before the weekend. Personal Income (0.0%) and Personal Spending (-0.5%) data were exactly in-line with expectations. Month-over-month Core PCE was +0.1% and year-over-year it was +1.3%. The Fed’s preferred inflation measure – the core PCE deflator – was in-line with expectations, at -0.5%, and thus continues to show a lack of inflation for the moment. UMichigan consumer confidence data is due at 10am – a reading of 70 is expected. Today’s data is essentially a “non-event,” and investors are already looking forward to next week’s critical data, which includes October manufacturing activity, auto sales, retail chain store sales, and the monthly unemployment report. Further, the FOMC meets next week as well, and Obama is due in China. In corporate news, CVX is higher after beating earnings expectations, MET is lower after posting its third straight quarterly loss, and DUK beats by 2c but misses on revenues. Russell rebalance today (big prints on the bell), and year-end for many mutual funds today. Watch the S&P500 1050 level as the key technical indicator: Close above = bullish, close below = bearish.

For those interested in what makes up economic data like “core PCE,” I have stolen from Wikipedia here:

The PCE price index (or PCE deflator) is a United States-wide indicator of the average increase in prices for all domestic personal consumption. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the Gross Domestic Product in the BEA's National Income and Product Accounts, personal consumption expenditures. The less volatile measure of the PCE price index is the core PCE price index which excludes the more volatile and seasonal food and energy prices. In comparison to the headline United States Consumer Price Index, which uses one set of expenditure weights for several years, this index uses a Fisher Price Index, which uses expenditure data from both the current period and the preceding period. Also, the PCEPI uses a chained index which compares one quarter's price to the last quarter's instead of choosing a fixed base. This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling. The PCE rises about 1/3% less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Alternatively, an unpublished report on this difference by the BLS suggests that most of it is from different ways of calculating hospital expenses and airfares.

With regard to recent trading action, many believe it’s still all about the USD. ResearchEdge, among others, has been pretty vociferous on this topic, and this morning’s soliloquy is particularly entertaining (for those who want the executive summary, a declining dollar is good for us in the short term, but is not sustainable in the long term, as such weakness indicates loudly and clearly that Rome is Burning… so if Bernanke & the FOMC next week don’t talk up the USD and the potential for removal of stimulus then, sure…the markets will rally as the dollar declines. But, as it appropriate with Halloween tomorrow, this only represents a “sugar high” from which a violent crash is only a matter of time):

Why was the US Dollar Down yesterday?

1. Timmy Geithner speaking - that's the Credibility Cross that the American Financial System still has to bear. I'll let you watch the YouTube yourself.

2. President Obama speaking - right after the non-Great Depressionista GDP report of +3.5% was released, he came out and talked down the number.

There is no credibility in a currency that is backed by conflict of interest. Whether it's Geithner telling you that US banks are "not too big to fail" or Obama telling you that you better get cozy with an "emergency" rate of ZERO percent on your hard earned savings accounts, it's all the same thing. It's just wrong. Americans don't buy it, and neither do our Chinese Creditors.

Newsflash for CNBC: markets don't trade on lagging GDP reports. They trade on future expectations.

With the US Dollar breaking down through my immediate term TRADE line of $76.20 yesterday, you saw the power associated with a multi-factor macro model. You can say that it doesn't work, and you can say that Obama and Geithner are right too - but, if you say that, Mr. Macro Market is voting on the other side of you. Market prices don't lie; people do.

The Buck is Burning again this morning (down to $75.88) because the 2 aforementioned political statements reminded those who are looking forward to next week's FOMC decision that there is an explicit message from Bernanke's boss to not signal a rate hike.

Message from Obama: Get back to your Depressionista history books Benny and start getting beared up again - there is no time for you to be doing math right now. It's all about revisionist history and keeping rates at ZERO for an "exceptional" period of time. With Healthcare and Afghanistan, I don't have time to deal with the house of cards that Robert Rubin built. Not now.

Unfortunately, President Obama, markets wait for no one - not even you. Norway raised rates this week and India and China are signaling sobriety now too. As the world moves toward the Australian interpretation of non-Great Depression math, they'll be moving away from the compromised rates of return you are signing off on.

My immediate term TRADE lines of support and resistance for the SP500 are now 1042 and 1075, respectively. If Bernanke panders again next week, Burning the Buck further from here, and 1066 in the SP500 holds, we could see a final 2009 crescendo of clanging Macro Monkeys like me take the SP500 to higher-highs at 1109. People hate this rally, and they probably hate the idea of that happening too.

The alternative, President Obama, is to have Bernanke signal what he should have a month ago. Yes, you'll have to take your medicine and see the stock market drop like it did in 4 out of the last 5 days. But medicine is what this sick monkey called the US Financial System desperately needs. A reflated stock market hasn't helped your approval ratings anyway, so you may as well get on with it.

NDN downgraded at BofA/MLCO. WSJ reports that AMZN is lagging in paying its suppliers. CITI names JCP, M, TGT “top picks.” BofA/MLCO ups BKS, WBD. CITI ups EQR, K, LINTA, TOL, WPZ. GSCO ups OMX. JEFF ups COH, KEX, ZUMZ. MSCO ups STI, TX. OPCO ups CYPB. PIPR ups SIGI. BARD ups AVB, MFE. UBSS ups AKS. DBAB cuts SYNT. GSCO cuts VMW. JPM cuts ITG. MSCO cuts CFN. UBSS cuts ABMD. Soleil cuts MON. HAR beats by 18c. GNW beats by 26c. LVS beats by 4c. CSFB ups LYG. MFE beats by 1c. MHK beats by 8c. TSRA beats but guides lower.

Asia higher overnight. Europe tracking lower this morning. USD +22bps. Gold -36bps. Oil -93bps. Bonds ticking higher, yields lower.

Brightpoint News:
Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume):

HARMAN INTL 37.00 +12.12% 11404
GENWORTH FINANCI 11.32 +11.2 % 670510
CIT GROUP INC .870 -8.42% 1445067
DTE ENERGY CO 35.49 -7.77% 130
ESTEE LAUDER 44.21 +7.46% 25465
EXCEED CO LTD 10.68 +6.8 % 1800
MANITOWOC CO 9.75 -6.7 % 61465
AON CORP 38.89 -5.58% 2734
ALLERGAN INC 57.80 +5.24% 300
METLIFE INC 35.25 -4.32% 5349
CUMMINS INC 47.90 +4.31% 73074
COVENTRY HEALTH 21.67 +3.63% 2215

Today’s Trivia: On this date in 1938, CBS Radio caused widespread panic in America. What happened?

Yesterday's Answer: Currently ~1.5 billion people use the internet, and according to one researcher speaking on NPR, the next billion users will “probably be farmers from Western China with only a grade school education…” and thus the push toward making the ‘net more universal in nature by ensuring Chinese and Arabic characters are supported.

Best Quotes: “That move yesterday caught me by surprise. I had my full bear on, and I wound up skinned and turned into a run. 8-1 to the upside. Retracing Wednesdays downward move. We are up for the month right now, and I believe there were few that though that would be the case. Volitily has been pretty high the last two weeks, remember the move on Bove comments last week? I still believe it'll pay to sell the beta, and rotate in the boring. The market is becoming very tough to trade. I'm not a big watcher of the VIX, but it looks to be staging a rally. I'm a seller of the rallies. We have published our Short Interest Report for period ending October 15, 2009. Overall aggregate adjusted short interest (ASI) for the S&P 1500 rose 2.4% in early October after falling 13% since mid August. Despite this recent up tick in shorts ASI levels are more than 1.5 standard deviations below their 2009 mean. We view short levels as a contrarian measure and consequently feel current levels are not market supportive.” --MLCO trader talk

Thursday, October 29, 2009

Morning Note...

Futures surge 1% higher after five days of weakness on the back of better-than-expected Q3 GDP, which came in at +3.5% vs. +3.2%/e.  Among other things, this represents a chink in the GS armor – recall they trimmed their expectations to +2.7% from +3% yesterday.  Initial Jobless Claims did not surprise, at 530k vs. 525k/e, but obviously remain at elevated historic levels.  Continuing Claims were 5.797M vs. 5.905M/e.  Personal Consumption was +3.4% vs. last quarter’s -0.9% reading and vs. the +3.1% expectation.  In corporate news, Kellogg’s (K) is higher on an earnings beat, gold miner AEM is lower on earnings, P&G beat by 7c, AKAM is higher after it raised estimates for Q4 sales, Burger King (BKC) missed earnings estimates, First Solar (FSLR) is down 13% on earnings, FLS is lower on reduced guidance, LSI is higher on earnings, MOT is higher on earnings, SYMC beat estimates, Timberland (TBL) beat expectations, Sprint (S) missed by 2c, and oil giant XOM is lower following their earnings release.  $31B in seven-year Treasuries will be auctioned today – results at 1pm.  Reminder that year-end for many mutual funds is Friday.  (For those interested, some base year-end on Friday’s NAV…others use September 31st as year-end…and for some year-end was Tuesday the 27th, which represents T+3…it just depends on the fund apparently.)  Geithner testifies before the House today.  Note the R2000 and the NASDAQ underperformed the DJIA and the SPX yesterday.  In fact, the Russell was down 3.5% and the SPX closed below the 50-day moving average…

Markets are positively buoyant on this morning’s GDP data, and – as always – how markets react today will be critical.  Was the better-than-expected number simply a result of “Cash for Clunkers” and other stimuli?  Will the jobs data provide a somber reminder of massive unemployment?  After all, there are still 500k people out of work each week… Feels like we came close to a rout (to the downside) yesterday – today’s tone is obviously positive, but why do I feel the proverbial Sword of Damocles swishing ever-closer?  Taking the 30,000 foot view, there is not much to love about the world these days – we have a state of emergency over H1N1, bank failures continue to grow, states and municipalities remain underwater financially, the consumer remains squeezed and unemployed, things are heating up geopolitically between the Taliban and Pakistan (which means the Taliban is probably acting on behalf of India at this point, creating the potential down the road for two nuclear powers in India and Pakistan squaring off), demand has been pulled forward in the form of Cash for Clunkers and first-time homebuyer tax breaks, more insider-trading arrests could be down the road, and so on… But the Bears have certainly gotten their +5% pullback over the last few days…will the Bulls now buy the dip given the GDP number?  Beware this number being “already priced in” to the markets, and beware – as always – the rush to take profits… Further, here’s one negative thought following a great GDP number:  does this mean the government will lean toward reducing artificial stimulus sooner?  If so, a positive GDP number could become a negative catalyst for equities. 

A friend passed on some absolutely fascinating numbers yesterday, and they are well-worth sharing (more details can be found at

Stock markets are up 60% plus. How does this rally stack up with previous ones?  Here are some key criteria of what previous 60% rallies have looked like when analyzed across 10 different key economic dimensions:

               * Year over Year Retail Sales: 9.3% average in prior 60% rallies versus -5.3% in the current one
              * Consumer Confidence: 95.5 average; 53.1 now
             * Capacity Utilization: 79.9% average; 66.6% now
             * Year over Year Industrial Production: 4.1% average; -10.7% now
             * ISM: 53.9 average; 52.6 now
             * Payroll employment gains over period: 2.2% average; -2.0% now
             * Decline in continued unemployment claims from cycle peak: -26.3 average; -11.6% now
              * Year over Year growth in total credit market debt: 9.3% average; 3.0% now
              * Year over Year growth in household debt: 8.8% average; -0.1% now
              * P/E Multiple: 16.8x average; 20.0x now

ORLY beats by 7c.  BofA/MLCO ups BPSG, GNW.  CITI ups EPD, PEG.  CSFB ups BMRN.  DBAB ups BXP.  JEFF ups SWIR.  JPHQ ups HGSI, PQ.  MSCO ups NXY, PXP.  OPCO cuts CBST.  PIPR ups AATI, EEFT.  BARD ups FITB.  TWPT ups URBN.  BofA/MLCO cuts FSLR, GT.  CITI cuts KSP.  JPHQ cuts PVTB.  PIPR cuts ATVI.  RBCM cuts REGN, RNR.  UBSS cuts ELN.  WELA cuts GCI. COCO higher on earnings.  WSJ reports DB net profit soars.  ING upgraded at Nomura.  LNC beats by 8c.  LYG in talks to avoid gov’t payback, talks ongoing.  XL earnings beat. 

Asia down 2% overnight following yesterday’s US weakness.  Europe roughly 1% higher this morning.  USD -40bps.  Oil +140bps.  Gold +70bps. 

Brightpoint News: 

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
AKAMAI TECH                22.15    +9.87% 69403
FANNIE MAE                  1.11      +8.82% 1128245
AMERICAN CAPITAL        2.89      +7.84% 6150
SYMANTEC CORP           16.95    +7.76% 63800
EXCEED CO LTD             10.87    +7.62% 100
LINCOLN NATL CRP         23.94    +7.6 %  11450
DEVELOPERS DIVER        9.79      +6.99% 750
FREDDIE MAC                1.24      +6.9 %  391199
EXPEDIA INC                  26.00    +6.82% 29860
MANITOWOC CO            10.10    +6.77% 20671
MGIC INVT CORP            4.49      +6.65% 4350
FIFTH THIRD BANC         9.41      +6.45% 32500
XL CAPITAL LTD-A          17.25    +6.28% 11250
MOTOROLA INC             8.43      +5.9 %  2669911
STARWOOD HOTELS      31.24    +5.9 %  200
LSI CORP                       5.28      +5.81% 9079
JABIL CIRCUIT                14.41    +5.26% 700
GENWORTH FINANCI      9.13      +5.06% 245844

Today’s Trivia:  ICANN votes tomorrow on the use of “universal URLs,” meaning Chinese and Arabic characters, for example, are set to become much more commonplace on the web.  The argument is that the English language has dominated the first phase of internet growth, but will not – by any stretch – dominate the next.  That’s the backdrop for today’s question – roughly how many people worldwide currently use the internet?

Yesterday's Answer:  Pepsi is named – in part – for dyspepsia, which is simply the fancy name for a stomach ache. 

Best Quotes:The weakness was fairly widespread. Breadth heavily negative in the broad based Russell 3000 with Decliners leading Advancers at a rate of 10 to 1.  Investors were definitely clearing the decks ahead of tomorrow’s Q3 Advance GDP Report.  The Vix has crept up to 27.91, the last two times it rose above 28.5 (in the past two months) the market has rallied 7%-8% in the next couple of weeks.  Remember pre-Lehman, the 30 level was a buy signal level.  The Composite Put/Call rose to 1.1 a level signaling we were close to a rally in the other pullbacks since March.   The potential wrench is the GDP report, which can move the market in either direction pre-open.  As long as GDP is close to in line, ideally, investors should want to see early downside follow through to  put long money back to work.  A pullback of 6%-7% in as many days, without a major shift of economic data should prove to be a buying opportunity.”  --BTIG note

Wednesday, October 28, 2009

Morning Note...

Futures -60bps this morning as the mini-correction from the 1101.36 year-high in the S&P500 continues.  Using this morning’s 1055/1056 on the futures, we’ve now corrected over 4% from the October 21st high.  Durable Goods Orders came in at +1%, exactly in-line with expectations.  New Home Sales are due at 10am.  Remember Q3 GDP and Initial Jobless Claims are due tomorrow morning.  In corporate news & earnings, educator APOL (-15%) is trading lower after earnings and an announced SEC investigation into revenue recognition.  Global steel giant MT (-2%) beat on earnings but missed on revenues.  Global software maker SAP (-8%) also beat earnings estimates, but missed on revenues.  On the plus side, credit card giant Visa (+1.5%) beat by 2c and authorized a $1B share buyback plan (yesterday, IBM authorized a $5B buyback plan).  Across the pond, the trend toward “stimulus removal” continues, as Norway raises rates 25bps, becoming the first European member to do so.  Results of the US Treasury auction are due at 1pm today.  In Washington, there is more and more talk about enhancing the government’s ability to crack down on “too big to fail” firms.  WSJ reports AMZN, EBAY, SHLD have increased spending.  WSJ also reports that “the auto supply base in the US remains largely cut of from capital funding needed to finance new vehicle programs and ramped-up production schedules.  This means that both auto parts suppliers and auto manufacturers could find themselves in a lurch if the vehicle market recovers next year.”  Interesting action yesterday, as the R2000 and the NASDAQ were off over 1%, versus a relatively flat day in the DJIA. 

Some important backdrop data… roughly 80% of companies reporting Q3 estimates have beat estimates, and we entered this week +62% off the March lows.  Since Alcoa kicked off earnings season October 7th, the S&P is up only 0.5%.  Recently, the market tone seems to have shifted into “selling off on good news” mode, which is certainly concerning… From a trading perspective, we’ve reached an important “tug of war” stage given the recent 4% pullback.  Will these types of dips be bought?  Or will the market continue to correct given the potential lack of buy interest from those who have taken profits and are enjoying an extended holiday on the sidelines?  Certainly everyone is aware of the “need” for a long-overdue correction.  But the markets are genius at fooling the largest number of people possible.  So what’s the surprise?  The potential exists for the velocity of a looming sell-off to surprise people, especially those who have not locked in gains.  5% down will get them thinking… 7.5% down might get them panicking.  Imagine the mind-set of the hedge fund manager who has just trumped the high water mark and is back in the “green” following 2008’s bloodbath, but who finds that cozy feeling rapidly slipping away as markets move downward.  In some sense, the potential inverse of a short squeeze could occur.  We’ll know soon enough, however.  If the S&P500 holds roughly 1050, which is the 50-day moving average, then the bulls will have defended their territory.  If not, we may see a quick additional leg down…  Further consideration can be given to the USD’s influence as well, given recent strength.  Any hiccup in global economic recovery would probably lead to a sustained, near-term, flight to quality rally in the USD, which would also create additional downward pressure on commodities and equities.  To simplify, if the global economic recovery pauses or falters on its own accord (i.e. naturally, like the recent UK GDP reading) or stimulus removal begins in earnest (i.e. artificially pausing) and this is viewed as “too early” by investors, the USD will probably gain and US equities will falter, along with commodities like gold, copper, platinum, oil, et. al…

BofA/MLCO ups CR; cuts APOL, RX.  CITI ups AKS, TGT.  DBAB ups WAT.  GSCO ups BPO, EW, TXN, UDR; cuts NUVA, SNDK.  KBIW ups BUSE, PNNT.  MOKE ups OSIS.  OPCO ups WYNN; cuts EVEP.  BARD ups EXAC, GKSR.  WELA ups CRDN.  ROTH cuts INTC, MELA, MRVL, NVDA.  BARD cuts ILMN.  WELA cuts LRY.  WSJ cautious on NYT, GCI.  AIB, IRE lower on proposed EU repayment requirements.  MSCO & RBCM cut APOL.  BWLD reports in-line but misses on revs.  CECO, COCO, ESI, STRA lower in sympathy with APOL.  CEPH higher on earnings and reaffirmed guidance.  CQB higher on earnings beat.  DWA beats by 7c.  HRS beats by 7c.  ILMN earnings miss.  MEE beats by 1c.  MOLX beats by 3c.  NATI beat by 3c. PEET beat by 3c.  RFMD beats by 4c.  PSYS misses by 6c.  PNRA beats by 7c.  Q beats by 2c.  VCLK beats by 1c.  HMC triples profit forecast.  WLP beat estimates.  Vitamin Shoppe IPO prices above the range, at $17. 

Asia mixed overnight.  Europe over 1% lower.  USD +10bps.  Gold +5bps.  Oil -90bps. 

Brightpoint News: 

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
APOLLO GROUP-A           62.00    -15.03%            1440393
FISERV INC                    43.40    -11.57%            400
UNISYS CORP                25.43    +5.65%             900
CONSTELLATION-A         15.547  -4.62%              10938
LEUCADIA NATL             22.39    -4.52%              500
MASSEY ENERGY CO       30.00    -4.18%              96941
DIRECTV GROUP IN        24.56    -3.99%              2000
CBS CORP-B                  12.90    +3.7 %              961
SIGMA-ALDRICH             52.05    -3.4 %              500
GANNETT CO                 11.18    -3.37%              1700
ADV MICRO DEVICE        4.98      -3.3 %              122154
FREDDIE MAC                1.19      -3.25%              84035
SYMANTEC CORP           15.65    -3.16%              1980
ORACLE CORP                21.20    -3.06%              89094
XILINX INC                     21.89    -3.01%              1000

Today’s Trivia:  What physical ailment is Pepsi actually named for?

Yesterday's Answer:  A “MacGuffin” is a plot device that moves along a story, but is essentially meaningless in and off itself.  Supposedly Hitchcock coined the term.  Popular examples include the Maltese Falcon statuette and the Ark from Raiders of the Lost Ark.

Best Quotes:With roughly 80% of companies reporting third quarter results beating estimates, the bottom-line results are far from disappointing.  Granted there is room to bemoan the lack of top-line growth in most cases, yet there has been little difference in the character of the earnings reports between the second quarter reporting period and the third quarter reporting period.

The big difference is the market's response to the reports.  Unlike before, "good" earnings news isn't provoking strong rally cries.

There have been some good sessions in the past few weeks and certainly some very good individual trading responses (see AMZN), but the net change for the S&P 500 since Alcoa reported its results Oct. 7 has been approximately six points or 0.5% (note: we're still talking a gain here). 

In the same length of time following Alcoa's second quarter earnings report, the S&P 500 had gained roughly 100 points or 11.4%.

Naturally, participants were hoping for more with the third quarter reporting period.  They haven't gotten what they wished for primarily because stocks were run up so much ahead of the actual reports.

This isn't to make light of the recent losses.  They are raising some eyebrows because they have been driven by the underperformance of the financial sector, which has dropped 3.2% since the time of Alcoa's report.  Recently, the tech sector has also acted poorly.  It is down 1.2% since the close on Oct. 19.”

Tuesday, October 27, 2009

Morning Note...

Futures flat to slightly lower on macro news this morning…emerging markets drift as India begins withdrawing monetary stimulus.  Additionally, Norway is expected to become the first European country to raise rates tomorrow.  China fell nearly 3% overnight, and Japan was off 1.5%.  S&P/Case-Schiller Home Prices fell 11.32% year-over-year, which is slightly better than the -11.90% expected.  Month-over-month, home prices showed a 1% gain.  Interesting “reversal day” yesterday, as markets reversed their early morning upward trend.  This was attributed to USD gains against the EUR, the potential end of the first-time homebuyer credit, the potential need for BAC to raise more capital, and health care concerns.
Regarding health care, yesterday Senate Majority Leader Reid announced that he backs a public-option plan as part of the health-care bill.  As a result of the potential for increased government competition, the health care sector was weaker, including HUM, AET, WLP, UNH, et. al.  Consumer confidence is due at 10am today. 

Obama is expected to announce $3.4B in spending projects to “modernize the nation’s electric power system.”  H1N1 headlines continue to flow this autumn, and recall that President Obama declared a national state of emergency.  BofA/MLCO made comments regarding commercial real estate:  According to CB Richard Ellis, the national office vacancy rate (vacant office space for lease divided by the total square footage of office space) rose for the eighth consecutive quarter to 17.2% in 3Q from 16.5% in 2Q – the highest in 16 years. In other words, commercial real estate remains under tremendous downward pressure. A rising vacancy rate means only one thing, in our view – lower rents and potential for more commercial mortgage defaults.  For additional sobering bearishness, see the most recent Jeremy Grantham note below in the quote section below.  Interesting tidbit embedded in a Bloomberg story this morning as to why the UK lags in terms of “recession recovery” following the recent negative GDP surprise:  UK Households have debts worth 183% of disposable income, which is the highest of any major economy.  In the US, this ratio is 134%.  In France, it is 100%, and in Germany it is 99%. 

For my part, I continue to feel that Q4 may be light – in trading terms – as investors lock in 2009 year-to-date gains and “sit on their hands” through year-end.  Remember another key “calendar item” that will affect the next couple of weeks:  most mutual funds’ year-end is October 31st.  Along those lines, Barclay’s had this “trading commentary” yesterday:  October market volumes are usually lighter than September, but this is not happening this year. Does this reinforce the chatter that many investors are closing shop early this year? Also, Oct 31 is year end for a portion of the mutual fund community. There has been talk that the market will suffer beyond this date. Historically the last week of Oct returns .7% (36.4% annualized), but a sell off has not been seen during the first week of Nov (returns .55% historically or 26% annualized).  Further, the general theme of market fatigue/frothy valuations/overbought conditions continue.  MS Asia chairman Stephen Roach said overnight, “Investors have ridden a very powerful upturn in these liquidity-driven markets and they want to believe we’re in a vigorous V-shaped recovery…The markets are a lot stronger than the underlying fundamentals of a very weak global recovery.”

Goldman Sachs sees a significant risk to renewed home price declines, and said “our working assumption is a further 5-10% decline by mid-2010.”  UNFI announces plans for Texas distribution center.  CSFB defends LO.  BofA/MLCO ups FRT.  FBRC ups TXN.  GSCO ups CAKE.  WELA ups CVC, VZ.  CITI cuts OKE.  KBWI cuts WSH.  UTX may be bidding for GE’s fire alarm unit.  CAL switches to Star Alliance and increases the chance it may merge with UAUA.  WSJ reports that large tech firms are ramping up advertising spending (JNPR, CSCO, GOOG, INTC, MSFT, YHOO).  ARCI enters into sales and recycling agreement with GE.  BIDU beats by 35c but guides Q4 lower.  BP beats by 11c.  CE beats by 15c and beats on revs.  CRDN misses but lowers guidance.  DRYS higher on earnings.  FLEX beats by 4c.  HMA lower on earnings.  HSII beats by 17c and guides higher.  LDK guides higher.  LIFE beats by 11c.  LULU raises guidance.  PCX beats by $1.05, revs in-line.  POOL misses by 6c.  PRE beats.  RCI beats on earnings and revs.  CITI cuts SE.  BLAIR cuts SGMS.  RCII beats by 4c.  SOA beats by 10c.  SVA higher on third order for H1N1 vaccine from China.  VFC misses by 1c, trading down 6%.  WINN misses by 7c.  WMS reports in-line, misses on revs.  ZRAN guides Q4 revs lower.  UA beats by 8c.

Asia lower overnight.  Europe holding on to slight gains.  USD -10bps.  Oil +60bps.  Gold -15bps. 

Brightpoint News: 

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
CABOT OIL & GAS          41.25    +7.67% 16543
EXCEED CO LTD             11.49    +6.78% 1400
LIMITED BRANDS            18.21    -6.57%  267658
VF CORP                       73.98    -5.75%  600
NEW YORK TIMES-A       10.54    +4.56% 100
HOSPIRA INC                 48.38    +4.49% 2200
SPECTRA ENERG            18.85    -4.27%  1300
TEXTRON INC                18.99    +3.43% 13400
CONVERGYS CORP         11.00    +3.19% 100
TELLABS INC                  6.35      +3.08% 51417
MGIC INVT CORP            4.72      +3.06% 2200

Today’s Trivia:  What the heck is a MacGuffin?  (hint, it’s actually a pseudo-technical term from the arts…) 

Yesterday's Answer:  According to the standard formula set by Queen Victoria in 1861, husbands are mourned for 2-3 years, children are mourned for a year, grandparents & siblings are mourned for six months, and aunts/uncles & wives are mourned for three months…

Best Quotes:U.S. Equities Will ‘Drop Painfully,’ Grantham Says (Update3)  2009-10-27 07:49:00.848 GMT

By Patrick Rial
     Oct. 27 (Bloomberg) -- U.S. stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and shrinking profit margins, according to investor Jeremy Grantham.
     The so-called fair value for the Standard & Poor’s 500 Index is at the 860 level, the chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., which oversees about $89 billion, wrote in a quarterly report. The gauge fell
1.2 percent yesterday to 1,066.95. It has rallied 58 percent from a 12-year low on March 9 on rising confidence a U.S.
economic recovery will boost corporate earnings.
     “My guess, though, is that the U.S. market will drop below fair value” before 2010 is over, said Grantham, 71. “Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits.”
     Equities have rallied globally since March amid signs government and central bank stimulus measures are helping countries exit the worst financial crisis since the Great Depression. Analysts estimate S&P 500 companies’ earnings per share will climb 53 percent in the next two years.
     Grantham said his firm recently reduced equity holdings from a “neutral” 65 percent weighting in its portfolio to 62 percent, leaving “room to pull back further” should markets continue to climb. He said he favors emerging market stocks as they are likely to enter a bubble.

                          Previous Calls

     “For once in my miserable life, I would like to participate in a bubble if only for a little piece of it instead of getting out two years too soon,” Grantham said in the report, which was posted on his firm’s Web site.
     In January 2008, Grantham advised moving to cash and said credit problems with subprime mortgages would likely spread to commercial real estate. The S&P 500 plunged as much as 49 percent last year to an 11-year low in November amid a slowing global economy and mounting credit-related losses at financial institutions, which now total $1.66 trillion.
     Grantham said last October stocks had become “moderately inexpensive” and investors were likely to see a “once-in-a- lifetime investing opportunity.” The S&P 500 has returned 25 percent in the past year.

                          ‘Sucker Rally’

     Not all of his calls have been accurate. The investor told Barron’s magazine in an interview published November 2003 that equities were in a “sucker rally.” The S&P 500 surged 49 percent in the next four years to a record high in October 2007.
     Grantham’s view on U.S. equities being “overpriced” echo those of economist Andrew Smithers, who said on Oct. 23 the S&P 500 is about 40 percent overvalued and likely to decline as quantitative easing from central banks draws to a close and companies issue more shares.
     Still, the worst performance by U.S. stocks compared with junk bonds since at least 1986 is making some investors even more bullish on equities. While owning debt in the riskiest companies has paid about the same as the S&P 500 Index over the last 23 years, bonds are returning more than twice as much in 2009, according to Merrill Lynch & Co. and Bloomberg data.
     Barclays Plc and ING Groep NV had been increasing share purchases on speculation that improving corporate profits will prolong the rally in equities and shrink the gap again.

                          Profit Margins

     Grantham and Smithers aren’t so positive on the outlook for earnings. Profit margins at U.S. non-financial companies have averaged 30.6 percent during the last 12 months, “well above their long-term mean reverting average,” according to a September report from Smithers. Smithers’ definition of profit margin refers to earnings before depreciation, interest and taxes as a percentage of output.
     Economic and financial data “will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away,” Grantham wrote in his report.
“It is a law of nature that strong estimates will abound after a major market rally. The earnings and economic growth estimates in such cases are usually throwaways.”

Monday, October 26, 2009

Morning Note...

Futures slightly higher (+10bps) this morning on light corporate news, light economic data, middle-of-the-road earnings (VZ beats by 1c, GLW beats by 3c, LO misses by 8c), and USD weakness.  Across the pond, Electrolux (the world’s #2 appliance maker) is trading higher on impressive earnings, but financials are weak, led by Lloyd’s (-4% on capital raise) and ING (-10% on capital raise).  Expect things to heat up later this week, however, as roughly 25% of the S&P500 is scheduled to report.  Further, we’ll see major economic data in the form of Q3 Real GDP (+3.2% expected), S&P/Case-Schiller Home Prices, Durable Goods Orders, New Home Sales, and Chicago PMI.  Another major theme for the week will be Treasury issuance, as a record $123B is due for auction.  Watch the USD off that Treasury supply, as one of the subtle (or maybe not-so-subtle) driver of markets continues to be foreign currency.  Brazil’s 2% tax to curb appreciation in the Real, Canada’s concerns for the strength of its currency, and the London Telegraph’s commentary that the “Euro at $1.50 is a disaster for Europe” all point towards further action to come in currency markets.  In other words, the weak dollar is truly beginning to concern people. 

Interesting to note that Obama visits China in the weeks ahead.  Watch that trip closely for hints of what is to come from the US’ largest debt holder… The recent issue of the Economist discussed the complex relationship between China and the US, and ResearchEdge summed this up well in their morning note:

This weekend, The Economist focused on Confucius and China's image in a 14 page special report on "China and America - The Odd Couple". I have cited Harvard historian, Niall Ferguson, in recent weeks - he calls this "Chimerica." Putting the "Chi" before the "merica", capitalizing the "C", is an important point to think about.

Some of the points of focus from The Economist were:

1.      "America is the world's biggest debtor and China its biggest creditor"

2.       "China is building its first aircraft carrier"

3.      "Economic freedom is one value that Mr. Obama should not sacrifice on his first visit to China next month"

>Ok. So. What's new about any of those points? Nothing.

China, or The Client as we like to call her, has $800 Billion in US Government Debt, and she doesn't have to buy any more of it. China won't let the Pentagon see what's underground at her military headquarters in Beijing. And China certainly doesn't need a lesson from Bush or Obama on what the Greenspan version of "free markets" can inspire!

All this said, it is important to recognize that the world is figuring all of this out. Like a Confucius' quote, it's pretty straightforward. China has economic leverage. China wants to build some form of military leverage with that economic leverage. And China's want for a globally managed economic system that diversifies away from a US centric "free market is the best path to prosperity" (Kudlow/CNBC) view is becoming an important geopolitical consensus.

For those keeping score, we are through roughly 50% of earnings season.  CSFB raises gold estimates.  AGP lowers guidance.  MSCO cuts HRB.  MRVL raises guidance.  NVTL, TDC positive mention in Barron’s.  PBI cut at GSCO.  RVBD upped at PIPR.  STI, USB cut at Rochdale.  TLAB beats by 1c, misses on revs.  SUSQ ups UA.  BCAP ups WFSL.  JEFF ups SKH.  KBWI ups UBSH.  WELA ups GNTX.  OPCO cuts ZGEN.

Asia mixed overnight.  Europe slightly higher.  Gold flat.  Oil +55bps.  USD -10bps. 

Brightpoint News: 

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
AMERICAN CAPITAL        3.22      +5.57% 45952
TERADATA CORP           29.77    +5.08% 4680
RADIOSHACK CORP        16.40    +4.73% 47563
TELLABS INC                  6.40      -3.9 %  31500
SUNTRUST BANKS          20.22    -3.67%  25835
LEGG MASON INC           32.96    +3.32% 3600
H&R BLOCK INC              18.85    -3.13%  1600
FIFTH THIRD BANC         10.05    -2.8 %  112081
DYNEGY INC-A                2.30      +2.68% 3000
AES CORP                     14.60    +2.67% 300
PITNEY BOWES INC        25.18    -2.67%  1500
CIT GROUP INC              1.17      +2.63% 652897

Today’s Trivia:  In 1861, after her husband Albert died, Queen Victoria of England formalized the standard for mourning.  According to this standard, arrange the following in descending order of time spent mourning:  Siblings, Child, Husband, Wife, Grandparents, Aunts/Uncles. 

Yesterday's Answer:  Deoxyribonucleic acid is also known as DNA.

Best Quotes:How the U.S. Blew Trillion-Dollar Trade of Century: Mark Fisher
2009-10-26 01:00:00.0 GMT

Commentary by Mark Fisher
     Oct. 26 (Bloomberg) -- Hindsight is 20/20, especially when it comes to missed trading opportunities. But when the government has the trade of the century at its fingertips and fails to take advantage of it, someone has to play the Monday morning quarterback.
     Flashback to 2008: When the government was forced to bail out the financial system, our friends in Washington also had the opportunity to make the trade of the century for the American taxpayer. While Uncle Sam succeeded in the former, he failed miserably in the latter.
     Lehman Brothers Holdings Inc.’s shocking fall exposed the instability of the U.S. banks. In the aftermath, it quickly became clear that the collapse of the financial system was imminent without the intervention of the U.S. government.
     In a recent interview in the Financial Times, John Thain, Merrill Lynch & Co.’s former chief executive officer, gave an insider account of those dark days: “Once it became clear that Lehman wasn’t going to be rescued and was going to go bankrupt, the group then shifted its discussion to OK, well, how do we prevent this domino effect?”
     Within this environment of impending doom, the government had no choice but to play Atlas and save the financial world.
Unfortunately, it failed to realize that along with this role came a tremendous opportunity: to capitalize on the situation.
In this sense, the government failed to make the trade that would have catapulted the taxpayer -- rather than just the banks
-- back to stability.

                       Mitigated Animosity

     The government had an opportunity to structure the following innovative investment solution: Uncle Sam could have demanded 25 percent to 30 percent of the underlying equity in the banks before agreeing to negotiate a bailout package with the weakened institutions. Had the government brokered a deal that tied bank earnings to taxpayer payback over time, the animosity between Wall Street and Main Street that exists today would have been eliminated, or mitigated at the very least.
     I’m certainly not advocating government control of the banks; rather, just the opposite -- the government would have taken a passive stake and then stepped aside to let business take care of business.
    Unfortunately, our leaders in Washington lacked the shrewdness required to guarantee taxpayers a permanent ownership stake in the banks their money was being used to save. An innovative investment solution could have secured some of the necessary funds to fix our disaster of a health-care system or Social Security mishap.

                        Negligible Profits

     Instead, the government went ahead and lent hundreds of billions in capital to Wall Street, insured all the money-market funds, bailed out companies such as American International Group Inc. and allowed financial institutions to issue government- backed debt while exacting negligible profits in return.
     And so I ask: What trader in his right mind decides to dump his money into a glorified black hole, taking on unlimited risk in the process, for minuscule returns? I’m no socialist, mind you. All I am saying is that the banks should have been made to drop off an envelope at the taxpayer’s doorstep every month.
Obviously, no one in President Barack Obama’s administration has ever watched “The Godfather.”

                          Lay-Up Trade

     Thus, when confronted with the opportunity to make an epic trade, the government managed to make the worst deal possible -- so bad that I’m completely comfortable comparing it to the mistake made by the Native Americans back when they sold Manhattan for $24. Just as the settlers weren’t to be blamed then the banks aren’t to be vilified today. When the U.S.
government gives you a lay-up trade, you take it. Anyone in the banks’ position would have taken advantage of the terms they were offered and, frankly, would have been stupid not to.
     Had Uncle Sam been a student in my class, he would have gotten an “F” in Sensible Trading and an “Incomplete” in Bailout 101. To put this all in perspective, just consider for a minute how in the world Warren Buffett managed to negotiate a better deal with Goldman Sachs Group Inc. than the government did for the taxpayer. The policy wonks on Capitol Hill should have stuck to what they know best and called in someone like Buffett or bond guru Bill Gross when it came time to negotiate.
     Obviously, Federal Reserve Chairman Ben Bernanke and his cronies have learned from the experience of the Great Depression how to repair what has been broken, but they have failed to understand how to capitalize on it.
     The jury is still out on the verdict for the bailout, but I would bet good money that the worst is yet to come for the economy. While some are speculating that the financial crisis is over, I’d say we’re still in Act I, with a great deal of financial drama left to unfold.
     There’s no question that the government officials who brokered the deal with major banks during the crisis will ultimately go on to become highly respected economists, academics, professors and the like. But I can guarantee that none of them will ever be hired on our trading floors.

     (Mark Fisher, author of the 2002 book “The Logical Trader,” is the founder of MBF Asset Management LLC. The opinions expressed are his own.)