Thursday, December 17, 2009

Morning Note...

Futures -85bps this morning on USD strength (+110bps), the lower-than-expected price and size of the Citigroup offering ($3.15 and $17B, respectively), a Meredith Whitney estimate-cut of Goldman Sachs & Morgan Stanley, lowered Q3 guidance from global bellwether Fedex (beat by 4c but -3% premkt), and stronger-than-expected (i.e. bearish) jobless claims (480k vs. 465k/e).  Continuing Claims came in at 5.186M vs. 5.17M expected.  Global financials are lower today on the official Basel Committee release outlining stricter reserve standards.  Recall that yesterday bullish news had leaked out (looser standards, more time), but it appears the actual release went the other way.  According to Bloomberg News:  “Banks would have to set aside more capital by the end of 2012 to provide greater protection against downturns, under proposals released Thursday by international financial regulators….The proposals must be adopted by national governments before becoming the de facto global standard.  That process could take years, if the history of the original Basel II agreement is any guy.  Even after years of negotiations it was never fully implemented….On Wednesday, banking shares rallied on news reports that predicted regulators would give banks more time to implement the measures.”  Leading Economic Indicators are due at 10am, along with Philly Fed data.  ORCL, RIMM, and NKE report after the bell tonight.  BofAMLCO is out with a call for a Q1 correction this morning (“Valentine’s Day Massacre”).  See very bottom of quote section below for details…

Art Cashin discussed yesterday’s FOMC release in this morning’s note:

What To Watch For From The Fed – While the FOMC statement didn’t say tightening is at hand, it did hint that loosening is coming to an end. What should we look for to gauge what’s going on? Rather than wait for the next FOMC statement or next Bernanke speech/testimony, we can begin to watch the actions of the Fed in the marketplace. The savvy folks over at Strategas decided that the best roadmap to follow the Fed may be Bernanke’s op-ed piece in the Wall Street Journal back in late July. Here are the key points they cited:

The problem can [also] be addressed by supplementing payment of interest on reserves with steps to reduce reserves and drain excess liquidity – the second means of tightening monetary policy. Here are four options for doing this. First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements… Second the Treasury could sell bills and deposit the proceeds with the Federal Reserve… Third … we can offer term deposits to banks… Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.” --Fed Chairman Bernanke, WSJ Op-Ed, 7/21/2009

We think that’s a nice synopsis of the easy strategy alternatives. There may be others, but since the Chairman set the table with these, we assume these are his top choices. Things will start to get interesting as yearend balance sheet pressures begin to build.

BAC names Brian Moynihan new CEO.  T initiated Hold at DBAB and EW at BCAP.   GIS beat estimates.  SHLD $500M buyback.  PFCB $100M buyback.  DBAB ups UNM.  JEF ups CA.  JPHQ ups MHK.  Janney cuts ADP.  OPCO cuts SEP.  MSCO cuts ACV.  JEFF initiates AMLN with Buy.  APWR announces wind farm project.  CNO prices offering at $4.75.  Reuters reports DB is considering a bid for RBS Sempra.  EZCH prices 4M share offering at $10.50.  FSLR raises 2010 outlook.  FUN to be acquired by Apollo for $11.50/share.  HOG cut to Conviction Sell at GSCO.  BofAMLCO initiates INCY with Buy.  BCAP initiates LEAP with UW, DB initiates with Sell.  MSCO ups LNC.  NANO announces offering.  PAYX beats by 2c.  PCS initiated UW at BCAP, sell at DBAB.  PIR higher on earnings.  UBSS cuts SHPGY.  YONG secondary prices at $7.50. 

Asia mixed overnight with only Oz higher.  Europe -1% on average.  USD +110bps.  Gold -170bps.  Oil -115bps. 

Brightpoint News

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

S&P 500 PreMarket (last/% change prior close/volume): 
CITIGROUP INC              3.13      -9.28%  740950440
FREDDIE MAC                1.29      -5.15%  32170
ALLEGHENY TECH           39.96    +4.99% 13091
COOPER INDS                44.22    +4.74% 100
HARLEY-DAVIDSON         25.68    -4.5 %  34403
MGIC INVT CORP            5.07      -4.34%  2114
WENDY'S/ARBY'S-A        4.12      -3.96%  200
FEDEX CORP                  86.60    -3.72%  204564
FANNIE MAE                  1.05      -3.67%  206590
AES CORP                     13.65    -2.5 %  357

Today’s Trivia:  The longest running television show in history debuted on this date in 1989; twenty years ago today!  What is it?

Yesterday's Answer:  Pennsylvania had the most signers of the Declaration of Independence. 

Best Quotes:  “Fed reiterated everything from the prior statement.  Very ho-hum.  Market simply moved lower because they tried to take ‘em higher and it stalled out so might as well sell ‘em.  Simple as that” –WFC Trader Note

Obama Bullies Fat Cats While Message Meanders: Caroline Baum
2009-12-17 02:00:00.1 GMT
     Dec. 17 (Bloomberg) -- We saved your collective derrieres. Now it’s your turn to save ours.  That was the essence of President Barack Obama’s message to the “fat-cat bankers” who were summoned to the White House Monday and told to open the lending spigot.  It was 14 months ago that these same, albeit scrawnier felines, got the call from then-Treasury Secretary Henry Paulson and were told to take the money the government was handing out.  What will it be next?  In a “60 Minutes” interview Sunday, Obama chastised bankers for their irresponsible actions that got us into this mess. Then he prodded them to do more of the same.  That’s not what he said, exactly. He and his economic advisers aren’t advocating another subprime lending binge. They just want to make sure loan officers take a second, third, even fourth look at an application to make sure potential borrowers aren’t going away empty-handed.  How do these folks think small banks earn a profit? They don’t do it by packaging pick-a-pay or negative amortization mortgages into collateralized junk and selling it to their best customers.  No, these banks make their money the old-fashioned way: by taking in deposits and making loans to small businesses.  “You’re forced to make loans because you earn less holding excess reserves at the Fed,” says Bill Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, New Jersey.  Dunkelberg is in a unique position to evaluate the claim that banks aren’t lending in his role as both a banker and the chief economist at the National Federation of Independent Business, a trade group representing small business.  In the NFIB’s November survey, respondents said weak sales were the biggest problem, with only 5 percent of respondents saying access to credit was a hurdle. At the same time, Congress’s legislative agenda is “a major factor blunting consumer and owner optimism,” according to the report.  It’s not easy to quantify whether the source of the lending problem is a lack of demand or supply. The weight of evidence points to weak demand. Bank loans and leases fell 6.4 percent in the year that ended in November, according to the Federal Reserve’s weekly H.8 report. That’s neither here nor there. The data record the volume of existing loans, not the degree to which it reflects writedowns of existing loans or weak demand for new ones.  The Fed’s October Senior Loan Officers Survey found that demand for most major categories of loans weakened in the previous three months. Weak loan demand is a feature of all recessions. It may just be that banks have stopped making bad loans rather their refusing to underwrite good ones.

Bank of America Merrill Lynch Global Strategist Michael Hartnett has been on the road in Europe post our Macro Conf and based on client feedback, he is calling for a "Valentine's Day Massacre" - an unexpected 1Q correction caused by rising tightening & inflation expectations.


Quick and dirty marketing feedback from clients in Europe:


is more constructive on equities than expected but no raging bulls

expects 5-10% upside from global equities and outperformance versus credit

expects strong H1 for equities relative to weaker H2 because Fed hikes 2010'H2

is OW EM, commodities, tech and UW Japan, UK, developed market banks

is worrying about EM valuation but is staying OW emerging markets because it fears a "bubble"

is aware of the excellent EM consumer balance sheet but less aware of excellent US corporate balance sheet (= share buyback, M&A, capex)

is just beginning to ponder implications of a surprise US consumer recovery in 2010

still thinks there is a "bad event" out there somewhere

Our reasons for a correction in Q1...

it is unexpected

there will be Jan rally caused by lack of supply + inflows + expectations of new year rally which will engender some complacency

in Feb/March market will fret about 3/31 end of Fed MBS buying

in Feb/Mar market will fret over jump in headline CPI's around world (e.g. 3% in US, 8% in India....driven by base effect +oil)

March US payroll likely to spike to >500k due to census hiring which also causes market to believe liquidity punch bowl to be taken away

all the above cause 2-year Treasury yields to jump (temporarily) removing liquidity support for equities

arguably Dec rally in US dollar and Japanese equities (always tightly correlated with US 2-year yields) may be early warning of Q1 correction”


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