Tuesday, December 1, 2009

Morning Note...

Futures +80bps this morning on a global rally predicated on China’s bullish PMI reading last night and waning concerns over Dubai’s debt defaults.  This morning, the WSJ reports that Dubai World is negotiating to restructure $26B in debt.  (Although it is worth noting that Dubai’s credit default swaps have only improved by ~50bps and that markets in the UAE and Qatar are down over 6% today.)  Chinese manufacturing grew at the fastest rate in five years, achieving a 55.7 index reading.  Additionally, Australia announced an interest rate increase, aimed at cooling off a surging economy, for the third straight month to 3.75%.  Finally, Japan announced a round of quantitative easing as the Japanese Central Bank will lend 10 trillion yen ($115B) to help its economy.  Given global strength (Asia +1-2% overnight, Europe +2%), the USD index is down 40bps this morning to 74.475.  Gold achieves a new record high at $1200.  In corporate news, retailer GES is trading up 8% on better-than-expected earnings.  Retailers in general are bid up from yesterday’s weakness on holiday shopping whispers (Cyber Monday up 11% apparently).  GE and Vivendi agree on a $6B price tag for a 20% stake in NBC Universal.  ISM manufacturing data is due at 10am, along with Pending Homes Sales and Construction Spending.  November Vehicle Sales will be released throughout the day.  Obama is expected to announce his Afghanistan policy in a live speech tonight.  Geopolitical risk – given Iran, Afghanistan, Dubai, Greece – seems to be trending higher.  Recall that – in general – investors would flock to the safe haven USD in times of crisis, and thus pressure equity markets…  Note that November closed the books +5.7%, making it the 4th best month of 2009 thus far. 

Side note 1:  returning to last week’s FOMC minutes release (Nov 25th for the Nov 3-4 decision), it was stated that rates would be left at low levels for an “extended period.”  As a result, some members feared “such a policy stance could lead to excessive risk-taking in financial markets…”  At first glance, this is somewhat reminiscent of the following:

…lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values…

This is purely anecdotal, but it’s worth asking the question.  So what happened in the months following Greenspan’s famous warning?  From the period 12/96 (the speech was December 5th, 1996) to 3/00, the market surged ~117%.  The S&P then retraced much of this move  - from roughly 1500 to 750 – from March 2000 to October 2002…

Side note 2:  it’s always worth examining, or at least defining, market correlations and assumptions.  Since the USD/DJIA+S&P inverse relationship is a daily phenomenon these days, I’ve been meaning to print the following “explanation” from Art Cashin at UBS for some time:

The Dow is heavily weighted with large multi-national players.  A lower dollar makes their products/services cheaper in Europe and Asia.  The weaker dollar makes those off-shore earnings more powerful (and plentiful) on reconversion to the weak dollar.  The S&P has a bit less multi-national concentration and the Russell even less.  So, the weak dollar not only helps fund purchases of stocks and commodities, it also makes some of their businesses look better. 

WBC upgraded to Strong Buy at BUCK.  SPLS beats by 1c and says Black Friday was “good” on their call.  ABX announces removal of all hedges.  BofAMLCO ups ANR, AGAM.  AGO announces 24M share offering.  AIB to suspend dividends.  CITI ups BBT, FITB.  HGSI announces stock offering.  KGC upgrade at JPHQ.  LYG tgt cut at KBWI.  MENT upgrade at JPHQ.  OPCO ups MTSN.  SD to acquire Permian Basin properties for $800M, to offer 22M in common stock, and to sell 2M in preferred stock.  TTM upgrade at MSCO.  VNR announces 2.25M share offering.  PIPR ups WSO.  UBSS ups CLWR.  

Asia +50bps to +2% overnight.  Europe up nearly 2%.  Gold +115bps.  Oil +115bps.  USD -40bps. 

Brightpoint News

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

S&P 500 PreMarket (last/% change prior close/volume): 
AMERICAN INTERNA       30.05    +5.81%             667326
SMITH INTL INC             28.54    +5.00%             200
ALTERA CORP                21.94    +4.33%             179690
MBIA INC                       3.59      +3.76%             32456
TELLABS INC                  5.82      +3.74%             600
FANNIE MAE                  .910      +3.41%             214037
STAPLES INC                 24.00    +2.92%             31691
FREDDIE MAC                1.06      +2.91%             41141
NUCOR CORP                 43.54    +2.66%             4450

Today’s Trivia:  What city boasts the most psychoanalysts per capita?

Yesterday's Answer:  Afghanistan is the only country whose name starts with “A” but does not end in “A.”

Best Quotes:  “We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.” 

-- John Hussman weekly commentary http://www.hussmanfunds.com/wmc/wmc091130.htm

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