Tuesday, November 10, 2009

Morning Note...

Futures are slightly lower (-45bps) this morning as markets pause following yesterday’s strength and the USD rallies 15bps.  In corporate news, Moody’s is positive on AIG’s ability to pay back the Fed.  FLR is down roughly 6% on an earnings miss and lowered ’09 guidance, and TYC reported better-than-expected but is lower in premarket action as well.  Across the pond, EU objects to ORCL’s merger with JAVA.  VOD is down 4% on earnings.  Britain’s largest mortgage lender LYG plans to cut 5,000 jobs and German confidence was weaker than expected.  Treasury auctions on tap:  $25B ten-years today & $16B thirty-years Thursday.  Recall that the bond market closes early today and that tomorrow is a bank and bond market holiday.  Wall Street Journal gives front page treatment to Gold’s record run this morning.  Four Fed Governors speak today – we may see some interest rate headlines as a result. 

Note that yesterday’s price action was impressive, and the advance:decline ratio was 10:1, but volumes were below average.  A guest on CNBC just summed things up very neatly:  Markets have been propped up by the very stimulus (low interest rates, which is implicit encouragement to put on debt as a consumer and take on risk as an investor) that caused our bubble to burst a little over one year ago…there is a natural tendency for this bubble to contract a bit, to slow down its expansion, and we’ve seen that trend develop as volumes shrink and markets exhibit “overbought” conditions – what traders might describe as markets feeling “tired”…we saw this develop a couple weeks ago as markets pulled back ~5%...but this past week (FOMC meeting) and weekend (G20 meeting) we got a reaffirmation of global low interest rates for an extended period of time, which once again spurred equities higher…yesterday I reference “seeing this movie before” and this is true…how is the current monetary policy any different from Greenspan’s three+ years of 1% rates, which are widely attributed with causing credit and real estate markets to collapse in the first place…and as the TV guest also said, it’s only a matter of when this current bubble bursts, not if…timing is the key.  The problem, from a trading perspective, is that understanding the underlying potential for bubble destruction does not equate to actually being right about the markets.  In some sense, ignorance is bliss.  Easy monetary policy and historically low rates simply equates to “buy the market,” and that’s that.  Ignore moral hazard, ignore the debt load on the US Gov’t, ignore that – once again – the underlying message from Uncle Sam is “spend, don’t save”…ignore it all.  As they say, “hold your nose and buy ‘em” and “don’t fight the Fed.”   Clearly markets are pulling back today – this is natural after a solid upward surge yesterday – but all it takes is another subtle reminder of low rates, easy money, the USD carry trade, etc. for the dollar to drift and equities to rise again.  That is a tough trend to bet against.  One more paraphrased quote that we all know and love:  “the market can be wrong for a lot longer that you or I can stay solvent.” 

Incidentally, there’s (as usual) an interesting note out from ResearchEdge this morning and Briefing.com echoes a similar theme.  See the quote section below for the full text of both, which seem to hint at the tipping point which I referenced recently – the point at which USD down no longer simply reflates other asset classes, but instead means “holy crap, our currency is weakening and we – as a nation – are in trouble.”  As ResearchEdge’s CEO Keith McCullough says in making use of the concept of the bailout parachute as metaphor, “…the burning buck moving into crisis mode doesn’t mean this perceived parachute of down dollar is going to reflate your hard-earned life right before you have to comply with the laws of gravity.  I am not in the business of trusting these politicians to pull the rip cord for my family either.”  Beware the tipping point when USD down is no longer reflationary but instead implies “USA – the new Zimbabwe.”  No idea how far off that might be, but barring outside influences, new news, or a change in policy, it’s coming…

DBAB ups RHI.  GSCO ups CETV.  JPHQ ups NAT, TWTC.  OPCO ups RAX.  BARD ups ROK.  CITI cuts ENER.  DBAB cuts TRW.  GSCO cuts CTCM.  JEFF cuts OPXT.  JPHQ cuts ENER.  PIPR cuts SOLR.  ANN upgrade at SPHN.  GSCO adds BJ to Conviction Sell.  BZH higher on earnings.  DGI higher on earnings.  EPR files for 4.5M secondary.  ERTS lower on earnings.  FOSL beats by 10c.  HMIN reports better.  IHG lower on earnings.  LGF beats by 20c.  MBI -10% on earnings.  PCLN beats by 53c.  RL added to Conviction Buy list at GSCO.  UBSS ups VOD. 

Asia higher overnight.  Europe slightly lower across the board.  Bond prices are higher.  Oil is flat.  USD +17bps.  Gold +5bps.

Brightpoint News: 

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

S&P 500 PreMarket (last/% change prior close/volume): 
MBIA INC                       4.18      -12.92%            171928
AMERICAN INTERNA       39.64    +9.56%             1122124
FLUOR CORP                  45.25    -5.75%              93727
SPRINT NEXTEL CO        3.28      -4.37%              312596
ELECTRONIC ARTS         18.75    -3.99%              286262
EXCEED CO LTD             9.56      +3.86%             100
TYCO INTL LTD              34.27    -3.16%              92901
ANHEUSER-SPN ADR       48.33    -2.8 %              4700
JACOBS ENGIN GRP        44.10    -2.63%              600

Today’s Trivia:  What caused Woodrow Wilson to first proclaim a national remembrance day on November 11th, 1919 (which would later become Veterans’ Day)?

Yesterday's Answer:  The University of Miami is the area’s largest employer.

Best Quotes: “Just because no one with political power in Washington complains about the Burning Buck moving into crisis mode doesn't mean this perceived parachute of DOWN dollar is going to reflate your hard-earned life right before you have to comply with the laws of gravity. I am not in the business of trusting these politicians to pull the rip cord for my family either.

Yesterday, you saw the biggest one-day down move in the US Dollar since July. Was that the YTD low? What if it was? What if it wasn't?

1.      If it was, the US stock market has a very stiff wind ahead of herself into year end.

2.      If it wasn't, the US stock market only has one precedent of lower prices from here - the 2008 crash.

So that's why I am selling down my exposure to virtually everything. At a price, Dollar down will start to hurt as much as Dollar up can. How bad can it hurt? I have no idea - and I'm not about to "take a chance again", as Timmy Geithner is suggesting we should, either!

Yesterday was the 6th consecutive day of gains for the SP500. Since its March low, the SP500 has ripped the rails off of the Great Depressionista tracks for a +61.7% REFLATION. Benny Hill couldn't speed this comedy up any faster than it's played out. This has been the most expedited and hated rally in US stock market history.”  

--ResearchEdge note

“It was a prototypical rally for a market that has been enabled by central bankers and finance ministers who continue to supply easy money to a crowd that is growing addicted to risk trades.

The concern about that in our corner is that dollars are being borrowed to buy financial assets and are not being invested in productive capital projects.

The conundrum is that there is so much excess capacity right now that borrowing dollars to fund expansion projects is unnecessary.  That makes financial assets look like the only investment outlet at this point and that is potentially setting up for a nasty reconciliation either when crowded carry trades become less crowded or the bigger fool wises up.”

--Briefing.com note

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