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.”

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