Wednesday, November 4, 2009

Morning Note...

Futures +80bps ahead of this afternoon’s FOMC Statement.  No interest rate hike is expected, and for those keeping score at home, only Australia (twice), Norway, and Israel have tightened monetary policy thus far.  As always, the wording of the FOMC’s Statement will be closely watched for any hints of stimulus removal and for any meaningful economic commentary.  If no mention of stimulus removal is made, or if the wording continues to indicate that rates will be kept low for some time, expect the USD to weaken, thereby boosting equities.  Thus far, the dollar index is down 20bps.  In economic news, MBA Mortgage Applications were up 8.2% over the prior week.  Challenger Job Cut Announcements are down 50% versus a year ago.  Further, the ADP Employment Change was -203k vs. -198k expected, and the prior month’s reading was adjusted upwards to -227k from -254k.  ISM Non-Manufacturing Data is due at 10am and Oil inventories are due from the DofE at 10:30am today. 

Markets continue to digest yesterday’s mega-Buffett deal.  Buffett biographer Alice Schroeder penned an interesting Op-Ed, which you can find in the quote section below.  Today marks the one-year anniversary of the historic election of Barack Obama.  Unfortunately that “celebration” is bittersweet at best for the Democrats, who lost two key gubernatorial elections yesterday.  In both New Jersey and Virginia, Republicans stumping on the lack of Democrats’ ability to better navigate stormy economic seas won election.  Political analysts agree that these key victories denote solid momentum gains for the Republicans, who are licking their chops at the renewed ability to take the Democrats to task for progress in key areas of the economy, including unemployment and health care, despite their clear majority over at least two branches of the US government.  Further, the New Jersey results must be particularly painful for Obama, who personally visited the state three times recently in order to campaign for incumbent Corzine, who lost his seat nevertheless.  Looking ahead, CSCO reports after the bell today…Initial Jobless Claims and Continuing Claims tomorrow…official Change in Nonfarm Payrolls and Unemployment Rate Friday… Treasury to auction $80B next week…  Here’s an interesting tidbit that crossed the desk late last week – with roughly 40 days left in 2009, the S&P500 is roughly 40% below levels needed to be unchanged for the DECADE by year-end. 

After the bell last night, KFT reported better-than-expected.  Across the pond, SocGen Q3 profit more than doubled.  BHI reports 26c vs 35c expected, trading down 3%.  CMCSA beats by 8c.  TWX beats by 8c and reports revs in-line.  WBMD beats by 2c.  WCG beats by 15c.  CNW beats by 13c.  CRL beats by 5c, misses on revs.  DRIV beats by 1c.  DBAB ups EOG.  FKFS announces merger with Bryn Mawr Bank.  GRMN +5% on earnings & revenue beat.  HLS beats by 12c.  RBS upgrades ING.  IRE sees outlook as “challenging.”  MYGN misses by 3c, misses on revs.  NFP beats by 12c.  PACR beats by 3c.  BNP Paribas ups RBS.  RDN beats by 46c.  SGY beats by 42c.  TNDM beats by 1c.  TRLG -11% on earnings miss.  ZBRA beats by 2c.  DBAB ups AFFX, BCR.  FBRC ups GET.  PIPR ups DRIV.  SocGen ups EMR.  UBSS ups HL.  WELA ups CTSH, GET.  BofA/MLCO cuts SMI.  BCAP cuts BDK.  CSFB cuts LLL.  GSCO cuts ENR.  JPHQ cuts BNI, DLB.  OPCO cuts OPTR, STEC.  UBSS cuts BNI.

Asia higher overnight.  Europe up over 1% across the board.  USD -30bps.  Oil +125bps.  Gold +70bps.  Bonds ticking lower, thus yields are higher.

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
AMERICAN CAPITAL        3.20      +18.08%           396841
MBIA INC                       4.50      +9.49%             168796
TYCO ELECTRONICS       23.51    +8.29%             100
HARTFORD FINL SV        27.45    +6.31%             127255
MGIC INVT CORP            4.50      +5.63%             900
BAKER HUGHES INC        41.51    -4.42%              180968
LINCOLN NATL CRP         25.00    +4.17%             3303
FREDDIE MAC                1.29      +4.03%             269735
CB RICHARD ELL-A         11.21    +3.99%             600
CENTURYTEL INC           33.95    +3.6 %              2800
MANITOWOC CO            10.50    +3.55%             4000
LIZ CLAIBORNE               5.30      -3.28%              2664
AETNA INC                    27.49    +3.27%             6640
MOLSON COORS-B         51.00    +3.24%             5000
US STEEL CORP             36.60    +3.1 %              72480
CARNIVAL CORP             30.20    +3.04%             6494

Today’s Trivia:  Average winter temperatures at the North and South Poles diverge quite a bit…which is considerably colder and why?

Yesterday's Answer:  The largest hotel in the world by number of rooms is the First World Hotel in Malaysia (6,118).  The MGM Grand is next (5,690), followed by six more Vegas hotels.  #9 is the Shinagawa Prince Hotel in Tokyo (3,680) and #10 is the Ambassador City Jomtien in Thailand (3,610). 

Best Quotes: “Buffett Revisits Hunting Ground for Survivors: Alice Schroeder
2009-11-03 21:42:59.810 GMT

Commentary by Alice Schroeder
     Nov. 4 (Bloomberg) -- Warren Buffett called Berkshire Hathaway Inc.’s deal to buy the part of Burlington Northern Santa Fe Corp. that it doesn’t already own an “all-in wager on the economic future of the United States.”
     If so, it’s a survivalist bet. The railroad business is never going away, but it’s not going to lead the economy out of recession, either. Buffett has spent a lot of time in the last year burnishing his legacy by tackling Franklin Roosevelt’s role as the verbal antidepressant for this wretched economy. As I have said before, though, Buffett isn’t as bullish as he sounds.
     This deal has a feel about it of Berkshire’s 1998 acquisition of General Re, the last monster acquisition, which was overpriced and done with stock for complex motives that reached far beyond the appeal of the underlying business. Like General Re, Burlington is an uncharacteristically expensive deal. Berkshire is paying more than 18 times Burlington’s 2010 earnings, with 40 percent of the price in stock.
     Fortunately, this time he’s getting a less risky company.
This deal is mostly about managing risk. One of the many motives is to soak up Berkshire’s capital while Buffett is at the wheel.
That lowers the danger of his successor doing something dumb. In that sense, it furthers a goal that Buffett once told me about:
to create a company that will last a generation beyond his death. He can’t ensure it but he is going to try.

                      Railroads as Survivors

     Buffett likes companies that make bricks and boots and paint and electric utilities because they are survivors. So are railroads. Financial services have always been an exception -- the risky rocket fuel that leveraged the rest of Berkshire.
Buffett acknowledged that he bought General Re during the Internet bubble partly to dilute Berkshire’s equity holdings in stocks that couldn’t easily be sold, such as Coca-Cola Co.
     The combined effect of Berkshire’s huge and leveraged financial business cost the company its AAA credit rating during the financial crisis. Buffett considered the top grading the company’s “most precious asset,” something he would never do anything to endanger. He has downplayed the loss of the rating in public, but a motive of the Burlington deal is that it allows Buffett to protect his legacy by diluting Berkshire’s exposure to financial services. Who knows what it will take to manage risk in the markets 10 years from now?

                          Trial Balloon

     Buffett has to be thinking about what that means for his successor, yet another motive. For some time, he has been floating the name of David Sokol, who runs his utility business and NetJets, as a trial balloon (meaning he can yank the string back at any time). I admire and respect Sokol, but my comfort with him as chief executive officer is in inverse proportion to Berkshire’s exposure to financial services. Even brilliant CEOs often can’t manage such companies. The Burlington acquisition makes me a lot happier with Buffett’s choice of Sokol.
     There are many other motives. Burlington is well-managed.
Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia. In recent years, they have become somewhat like electric utilities that earn a respectable return on capital. U.S. railroads, which have been around since the early 1800s, won’t disappear any time soon. Berkshire is lobbying on energy policy, and this deal gives it more clout. There are some subtle synergies between the utility business and the railroad.

                          Stock Mincing

     A final motive I am confident about is that Buffett finally has a plausible excuse to split Berkshire’s B shares. He has spilled a lot of ink over the years decrying stock splits. A 50-
to-1 ratio isn’t a stock split, it is a mincing. Why do it?
Buffett has just given Standard & Poor’s the ticket it needs to add Berkshire to the S&P 500 Index at a time when S&P is desperate for large, solvent, high-quality companies to replace the casualties of last year’s carnage. It is high time for Standard & Poor’s to do this, but the stock’s liquidity has always been the sticking point.
     Buffett would never admit to wanting Berkshire to join the S&P, but becoming an acknowledged peer to other major companies is part of the path to his legacy. It isn’t enough for him that Berkshire lives on profitably long after he does. Berkshire is his “didactic enterprise,” his way of teaching the world how he thinks a business should be run.
     Of course, this is about Buffett’s ego, but then so are most great achievements. The business world would have been a lot better place in the past two years if more companies were run with survival and longevity in mind like Berkshire Hathaway.
     It’s safe to say, therefore, that as long as he is able, Buffett will keep an eye looking backward over his shoulder for possible acquisitions toward the companies such as railroads that he studied in his childhood. From the perspective of his almost 80 years, this is a hunting ground for more survivors.

     (Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life,” is a Bloomberg News columnist and a Berkshire Hathaway shareholder. The opinions expressed are her own.)

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