Friday, October 9, 2009

Morning Note

Happy Friday… Futures are 35bps lower as markets pause after this week’s roughly 3.5% gain to date. Further, the USD is slightly higher, weighing on equity markets somewhat. At a speech last night, Fed Chairman Bernanke simply used the word “tighten” and hinted at the long awaited shift in US monetary policy (“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period…At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road”), which buoyed the USD overnight, especially vs. the Yen. Further, White House Economic Advisor Larry Summers made bullish market comments, contrasting Mohamed El-Arian’s proposed “New Normal” of stagnant growth, contracted credit, and less jobs. Summers said “I would be very reluctant to accept the idea that the American economy no longer has the potential to grow rapidly…The American people have not become less capable of entrepreneurship. They have not become less dedicated to hard work, and the productive potential of this economy has not declined.” Speaking purely from the cheap seats, I would argue otherwise… As far as I can tell, there is no new “Greatest Generation” on hand to carry the USA to new heights of Empirical Greatness… On the back of Australia’s positive job growth and interest rate hike, Canada posted positive job growth of its own for September. Canada’s Unemployment Rate fell to 8.4% and employment rose by 30,600 jobs versus +5000 expected. Bearish note out from Gluskin Sheff’s David Rosenberg this morning (see quote section below). This is no surprise, but it’s worth a read. In corporate news, OXY to purchase Phibro from Citigroup.

With regards to the dollar, today’s lead WSJ article is about USD weakness. Additionally, yesterday’s WSJ Op-Ed from David Malpass certainly got people talking. Of particular note was his claim that the S&P500, if denominated in Euros, would be at 700 only. On the other hand, BTIG’s Chief Strategist Mike O’Rourke reminds us that “while people remain concerned about the prospects for the dollar and fear a currency crisis, one need only recognize that the dollar’s descent has slowed markedly once it returned to pre-crisis levels. During the first 7 months of 2008, the average level for the Dollar Index was 73.32, which is 3.5% below current levels.” Regarding Gold, Mike adds: “There is no denying the excitement in the markets surrounding Gold. Regrettably, it is related to this whole dollar momentum. Gold has staged a textbook breakout from a nearly two year Head & Shoulders continuation pattern. A traditional technical analysis price measurement indicates that Gold should go to $1300 over the next two years. At this juncture, the primary risk is how much of the breakout has been predicated upon this fast money, weak dollar trade. Just as in the case of the equity markets, fast money predicated upon a catalyst that has become too popular often leads to volatility for those investors who want to be there for the longer term. Simply put, it would have been easier had the breakout occurred absent a catalyst that can be reversed quickly.”

BERN raises estimates on GOOG, GE, YUM, ABT, TEVA, NOK. BERN lowers estimates for GNW, CME. ARO cut at GSCO. NDN reports lower-than-expected same store sales. POT lays off 700 employees. BofA/MLCO ups MAR. CSFB ups LRCX. DBAB ups AKS. GSCO ups SE. HSBC ups PTR. JPHQ ups NVE, PNW. OPCO ups FMER, SDTH, SVNT. BARD ups RIMM. BCAP cuts SVU. CITI cuts ZMH. GSCO cuts EP. JPHQ cuts UNS. Soleil cuts HOT, LTD, MAR. TWPT cuts AKAM. Cramer positive HTZ. INFY lower on earnings.

Asia higher overnight as China pops on return from anniversary holiday. Europe flat to slightly lower. USD +27bps. Oil -67bps. Gold -61bps. Bond prices lower, yields higher. Looking ahead, financial earnings from GS, JPM, and C are released next week.

Brightpoint News:

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

PreMarket S&P 500 Activity (last/% change prior close/volume):

SPECTRA ENERG 20.40 +4.62% 4741

CONSTELLATION-A 16.83 +3.89% 125

GANNETT CO 13.10 -3.61% 5000

LSI CORP 5.60 +2.94% 32090

SUPERVALU INC 15.20 -2.88% 7405

AKAMAI TECH 19.70 -2.67% 10000

HARLEY-DAVIDSON 23.85 +2.45% 314

ZIMMER HLDGS 50.75 -2.4 % 1000

NETAPP INC 28.21 +2.32% 12490

COGNIZANT TECH-A 38.10 -2.31% 10900

TESORO CORP 14.43 -2.3 % 1664

EL PASO CORP 10.33 -2.18% 30631

NEWMONT MINING 46.05 -2.04% 10070

VERISIGN INC 23.22 -2.03% 600

MOODY'S CORP 21.59 -2.0 % 3400

Today’s Trivia: This morning’s news flow describes Obama as the 3rd sitting President to win the Nobel Prize… so who are the two others?

Yesterday's Answer: AC stands for alternating current, and is typically a two-way flow of electricity. DC stands for direct current, and only flows one-way.


In this particular case, "V" stands for Valuation because every basis point of this 60% rally in the U.S. equity market from the lows has been due to an unprecedented expansion in P/E ratios. In fact, by some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.


There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic. Let’s look at the facts now that the September data are in.

On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions – we have more on the historical comparisons below). While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble.

It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct). It is also interesting that the last time the multiple was this high was back in March 2002, again after a huge countertrend rally that deployed ‘recession earnings’ from the 2001 downturn. If memory serves us correctly, this was right around the time that the bear market rally started to roll over and in fact, six months later, the S&P 500 was hitting new lows and 34% lower than it was when the multiple had expanded to … today’s level!” --David Rosenberg