Friday, October 30, 2009

Morning Note...

Futures -45bps on a relatively quiet morning. It appears that this week’s major event – the Q3 GDP release – has passed, and thus markets are settling in before the weekend. Personal Income (0.0%) and Personal Spending (-0.5%) data were exactly in-line with expectations. Month-over-month Core PCE was +0.1% and year-over-year it was +1.3%. The Fed’s preferred inflation measure – the core PCE deflator – was in-line with expectations, at -0.5%, and thus continues to show a lack of inflation for the moment. UMichigan consumer confidence data is due at 10am – a reading of 70 is expected. Today’s data is essentially a “non-event,” and investors are already looking forward to next week’s critical data, which includes October manufacturing activity, auto sales, retail chain store sales, and the monthly unemployment report. Further, the FOMC meets next week as well, and Obama is due in China. In corporate news, CVX is higher after beating earnings expectations, MET is lower after posting its third straight quarterly loss, and DUK beats by 2c but misses on revenues. Russell rebalance today (big prints on the bell), and year-end for many mutual funds today. Watch the S&P500 1050 level as the key technical indicator: Close above = bullish, close below = bearish.

For those interested in what makes up economic data like “core PCE,” I have stolen from Wikipedia here:

The PCE price index (or PCE deflator) is a United States-wide indicator of the average increase in prices for all domestic personal consumption. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the Gross Domestic Product in the BEA's National Income and Product Accounts, personal consumption expenditures. The less volatile measure of the PCE price index is the core PCE price index which excludes the more volatile and seasonal food and energy prices. In comparison to the headline United States Consumer Price Index, which uses one set of expenditure weights for several years, this index uses a Fisher Price Index, which uses expenditure data from both the current period and the preceding period. Also, the PCEPI uses a chained index which compares one quarter's price to the last quarter's instead of choosing a fixed base. This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling. The PCE rises about 1/3% less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Alternatively, an unpublished report on this difference by the BLS suggests that most of it is from different ways of calculating hospital expenses and airfares.

With regard to recent trading action, many believe it’s still all about the USD. ResearchEdge, among others, has been pretty vociferous on this topic, and this morning’s soliloquy is particularly entertaining (for those who want the executive summary, a declining dollar is good for us in the short term, but is not sustainable in the long term, as such weakness indicates loudly and clearly that Rome is Burning… so if Bernanke & the FOMC next week don’t talk up the USD and the potential for removal of stimulus then, sure…the markets will rally as the dollar declines. But, as it appropriate with Halloween tomorrow, this only represents a “sugar high” from which a violent crash is only a matter of time):

Why was the US Dollar Down yesterday?

1. Timmy Geithner speaking - that's the Credibility Cross that the American Financial System still has to bear. I'll let you watch the YouTube yourself.

2. President Obama speaking - right after the non-Great Depressionista GDP report of +3.5% was released, he came out and talked down the number.

There is no credibility in a currency that is backed by conflict of interest. Whether it's Geithner telling you that US banks are "not too big to fail" or Obama telling you that you better get cozy with an "emergency" rate of ZERO percent on your hard earned savings accounts, it's all the same thing. It's just wrong. Americans don't buy it, and neither do our Chinese Creditors.

Newsflash for CNBC: markets don't trade on lagging GDP reports. They trade on future expectations.

With the US Dollar breaking down through my immediate term TRADE line of $76.20 yesterday, you saw the power associated with a multi-factor macro model. You can say that it doesn't work, and you can say that Obama and Geithner are right too - but, if you say that, Mr. Macro Market is voting on the other side of you. Market prices don't lie; people do.

The Buck is Burning again this morning (down to $75.88) because the 2 aforementioned political statements reminded those who are looking forward to next week's FOMC decision that there is an explicit message from Bernanke's boss to not signal a rate hike.

Message from Obama: Get back to your Depressionista history books Benny and start getting beared up again - there is no time for you to be doing math right now. It's all about revisionist history and keeping rates at ZERO for an "exceptional" period of time. With Healthcare and Afghanistan, I don't have time to deal with the house of cards that Robert Rubin built. Not now.

Unfortunately, President Obama, markets wait for no one - not even you. Norway raised rates this week and India and China are signaling sobriety now too. As the world moves toward the Australian interpretation of non-Great Depression math, they'll be moving away from the compromised rates of return you are signing off on.

My immediate term TRADE lines of support and resistance for the SP500 are now 1042 and 1075, respectively. If Bernanke panders again next week, Burning the Buck further from here, and 1066 in the SP500 holds, we could see a final 2009 crescendo of clanging Macro Monkeys like me take the SP500 to higher-highs at 1109. People hate this rally, and they probably hate the idea of that happening too.

The alternative, President Obama, is to have Bernanke signal what he should have a month ago. Yes, you'll have to take your medicine and see the stock market drop like it did in 4 out of the last 5 days. But medicine is what this sick monkey called the US Financial System desperately needs. A reflated stock market hasn't helped your approval ratings anyway, so you may as well get on with it.

NDN downgraded at BofA/MLCO. WSJ reports that AMZN is lagging in paying its suppliers. CITI names JCP, M, TGT “top picks.” BofA/MLCO ups BKS, WBD. CITI ups EQR, K, LINTA, TOL, WPZ. GSCO ups OMX. JEFF ups COH, KEX, ZUMZ. MSCO ups STI, TX. OPCO ups CYPB. PIPR ups SIGI. BARD ups AVB, MFE. UBSS ups AKS. DBAB cuts SYNT. GSCO cuts VMW. JPM cuts ITG. MSCO cuts CFN. UBSS cuts ABMD. Soleil cuts MON. HAR beats by 18c. GNW beats by 26c. LVS beats by 4c. CSFB ups LYG. MFE beats by 1c. MHK beats by 8c. TSRA beats but guides lower.

Asia higher overnight. Europe tracking lower this morning. USD +22bps. Gold -36bps. Oil -93bps. Bonds ticking higher, yields lower.

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

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

HARMAN INTL 37.00 +12.12% 11404
GENWORTH FINANCI 11.32 +11.2 % 670510
CIT GROUP INC .870 -8.42% 1445067
DTE ENERGY CO 35.49 -7.77% 130
ESTEE LAUDER 44.21 +7.46% 25465
EXCEED CO LTD 10.68 +6.8 % 1800
MANITOWOC CO 9.75 -6.7 % 61465
AON CORP 38.89 -5.58% 2734
ALLERGAN INC 57.80 +5.24% 300
METLIFE INC 35.25 -4.32% 5349
CUMMINS INC 47.90 +4.31% 73074
COVENTRY HEALTH 21.67 +3.63% 2215

Today’s Trivia: On this date in 1938, CBS Radio caused widespread panic in America. What happened?

Yesterday's Answer: Currently ~1.5 billion people use the internet, and according to one researcher speaking on NPR, the next billion users will “probably be farmers from Western China with only a grade school education…” and thus the push toward making the ‘net more universal in nature by ensuring Chinese and Arabic characters are supported.

Best Quotes: “That move yesterday caught me by surprise. I had my full bear on, and I wound up skinned and turned into a run. 8-1 to the upside. Retracing Wednesdays downward move. We are up for the month right now, and I believe there were few that though that would be the case. Volitily has been pretty high the last two weeks, remember the move on Bove comments last week? I still believe it'll pay to sell the beta, and rotate in the boring. The market is becoming very tough to trade. I'm not a big watcher of the VIX, but it looks to be staging a rally. I'm a seller of the rallies. We have published our Short Interest Report for period ending October 15, 2009. Overall aggregate adjusted short interest (ASI) for the S&P 1500 rose 2.4% in early October after falling 13% since mid August. Despite this recent up tick in shorts ASI levels are more than 1.5 standard deviations below their 2009 mean. We view short levels as a contrarian measure and consequently feel current levels are not market supportive.” --MLCO trader talk