Tuesday, December 22, 2009

Morning Note...

Futures +35bps this morning as “lack of sellers” and “light volumes” mark this holiday period.  Economic data did surprise slightly, however, as the final Q3 GDP revision dampened some holiday cheer, coming in at +2.2% vs. the prior +2.8%.  Futures sold off from the earlier +50bps level on that 8:30am release.  Q3 Personal Consumption was in-line, at +2.8% vs. the prior +2.9%, and the GDP Price Index and Core PCE revisions were also in-line.  Richmond Fed data, Existing Home Sales, and the House Price Index are due at 10am.  Europe is higher despite Moody’s downgrade of Greece’s debt.  Further, the UK saw a smaller-than-expect upward revision to Q3 GDP, which contracted by 0.2%.  In Asia, China was lower on concerns that banks will need to raise capital.  According to the Washington Post, Obama meets today with a group of community bankers to discuss ways to increase lending.  According to the WSJ, more than 40% of East Coast consumers still have holiday shopping to do as a result of the recent snow storm. 

Note that the twos-to-tens spread on the yield curve hit a record high 280bps yesterday – as the WSJ notes, the spread “signals investors are expecting a stronger eco turnaround ahead.  Allocations are taking place into riskier assets and out of bonds; the steep curve is bullish for bank earnings outlooks.”   The always-entertaining ResearchEdge commentary is worth a read:

This morning, the Piggy Banker Spread (or the Yield Spread) is trading at its widest spread EVER. Yes, I am sure Galbraith would agree - EVER is a long time! The yield spread is the difference between 10-year and 2-year US Treasury yields. That spread has finally eclipsed its prior all-time record from June of this year (276 basis points), shooting up to +283 basis points wide this morning. Is this a bubble?  You bet your Merry Madoff it is. I have said it before, and I will say it again - there is a long term bubble forming in US banker bonuses. For all the bankers out there who are running this American outfit, here's my advice: if you can borrow short from your starving citizenry on the short end of this curve, then plug them with higher rates on the long end... have at it piggies! Your boys at the US government set this up for you on the silver platter for the holidays.

There is plenty of talk lately about the “Awful Aughts” or the “Lost Decade” of the last ten years.  Here’s an interesting Bloomberg chart comparing the performance of various assets during the past decade (it’s also near the top of today’s “most read” listings, note that gold “wins”):

TGT master trust data was worse-than-expected.  YHOO plans mandatory cost-cutting office shutdown over the holidays.  BofAMLCO ups MAN.  CITI ups AHD.  KBWI ups AMTD.  MACQ ups ESV.  UBSS ups IAG.  CITI cuts NRGP.  ROTH cuts GIGM.  AMKR raises guidance.  EXXI initiated Buy at UBSS.  JBL +5% on earnings beat.  PDLI announces new licensing agreement with LLY.  TTWO lowers guidance.  WRC cut at JPHQ. 

Asia mixed overnight.  Europe +75bps on average.  USD -6bps.  Oil -35bps.  Gold -50bps.

Brightpoint News

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

S&P 500 PreMarket (last/% change prior close/volume): 
JABIL CIRCUIT                15.93    +6.06%             107134
LEXMARK INTL-A            26.35    +2.97%             500
JDS UNIPHASE               7.78      -2.63%              14850
XCEL ENERGY INC           21.20    -2.62%              100
FREDDIE MAC                1.36      +2.26%             101994

Today’s Trivia:  Name the five European countries that border only one other country.

Yesterday's Answer:  On December 21st, the Earth’s axial tilt is at its furthest point from the Sun and thus the Sun’s position is at its lowest on the horizon all year.

Best Quotes:  “Are The Bond Vigilantes Coming Out Of Retirement – Things are beginning to stir in the bond market. The deflationary shadow seems to be disappearing and rather rapidly. Early signs of inflationary concerns are beginning to appear. The action of the bond markets may be causing, or at least posing, problems for the Fed and the recovery. Here is the take of the very savvy T.J. Marta in his morning comments:
The 2yr yield is higher, as we expected, but the 10yr yield is even higher. The rise in the 10yr is going to be problematic for policymakers as it will force mortgage rates higher, something the economy can ill-afford. The spread between the 30yr FNMA and the average of the 5yr and 10yr Treasury yields has plummeted 16bp in the past week to 157bp, a low since May 27, during a period when the 30yr mortgage rate spiked wider from 4.33% to 5.50% in the course of a month. With the Fed having abandoned its policy of Treasury buying and Congress hell-bent on spending the country into oblivion (we don't believe in the accounting gimmicks of the recent and pending legislation), either one of the two needs to change course or the economic rebound is in trouble.
If the bond vigilantes press the bet in the ten year, the upward pressure on mortgages could send housing back into a spiral. Concurrently, a spike in bond yields could bring more strength into the dollar. Certainly something we need to watch closely.”    --Art Cashin, UBS

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