Friday, November 20, 2009

Morning Note...

Futures are -60bps this morning, as the USD surges on a flight to quality resulting from a round of cautious global commentary.  First, yesterday Obama warned of a double-dip recession.  Second, the IMF said the global economy is heading towards a sustained recovery but given the risks of another downturn, it is too early to withdraw stimulus.  Third, PIMCO’s Bill Gross wrote of the increase in “systemic risk” from new asset bubbles resulting from record low interest rates.  Fourth, Europe is trending lower as Germany’s Finance Minister says “Germany’s economic and financial system is still fragile and the crisis is not over yet.”  Additionally, markets have been rattled on talk of possible Ukraine debt default (see quote section below).  Finally, in Asia, the Chinese “National Development & Reform Commission” Chairman Ping made cautious comments, saying “domestic growth is not strong enough, China’s recovery is not solid and China has an industrial overcapacity problem.”  In corporate news, DELL earnings disappointed, and the stock is down ~7%.  NKE increased its dividend by 8%.  JPHQ raised its forecast for the S&P500.  SJM (Smuckers) beat earnings estimates and is trading up 5%. 

Options expiry today, which should affect volume… It’s worth noting that the USD had surged as high as +100bps this morning… However, there is some talk of all USD futures trades over 76 being canceled due to a computer glitch that took the dollar index up artificially.  As a result, the dollar is weakening in real time and has leveled off around +50bps.  Regarding recent action, here’s a great summary from BTIG:  “The notable sign of risk reduction was evidenced by performance vs. the SP500 ..returns deteriorated down the market cap spectrum:  Russell 2000 (-107bps), Midcap (-72bps) as opposed to large caps outperforming the SP with the SP100 (+14bps) and Dow Industrials (+44bps).  Volumes continue to trend about 20% below average and the SP500 traded in a tight 50bps range most of the day.”  Nouriel Roubini’s recent RGE piece now argues for a U-shaped recovery.  The following summary is from Henry Blodget’s site “The Business Insider:”

RGE's 10 Reasons Why We Will See A U-Shape Recovery:

1. A U-Shaped U.S. Consumer. Roubini argues against a "V-Shaped" recovery, which he says puts too much confidence in this year's strong equity rally. 80% of the population reacts to home prices, not equity prices, and he forecasts that home prices will fall further.

2. Difficult Labor Market Conditions. Expect a strong second half of 2009 and a sluggish 2010 with growth below potential and continued job losses.

3. Balance Sheet Recession Caused By Over-leverage And Debt Accumulation. There are signs of a massive re-leveraging in the public sector. The cost of maintaining this level of debt will be very high and a drag on the economy.

4. Investment Usually Is A Strong Recovery Component. But investment will not recover while one third 
of current capacity is not utilized.

5. A Damaged Financial System And The Related Credit Crunch. Only half of the estimated $3 trillion global credit losses (IMF recently lowered their estimates) have been recognized so far. Expect more to come, especially in Europe.

6. Home Prices Said To Fall Further And Commercial Real Estate Bust Continuing.

7. Exit Strategy: Damned If You Do And Damned If You Don't. Removing fiscal accommodation will constrain a recovery that still appears weak. It has already been determined that it is too early to remove fiscal accommodation, but if it continues it will fuel persistent large budget deficits and lead to inflation.

8. Fall In Potential GDP Levels and Possibly In Potential Growth

9. Global Imbalances: Over-Spenders Retrench While Over-Savers Don't Compensate. Fall in demand from countries that tend to be over-spenders (US, UK) has not been neutralized by countries that tend to be over-savers (Japan, Germany).

10. Emerging Markets Fared Better But Can't Close The Consumption Gap. Can China/India be the engine of global growth? No. Can EMs decouple from anemic growth in G3? No. Is the policy response of China/Asia appropriate and sustainable? No. There are not the necessary social safety nets in EM countries, so the motive to save high. Private demand has to take over and drive growth

WBC cut at EVA Dimensions.  BofAMLCO ups ICA.  BBNT ups ANDE.  CITI ups LINTA.  DBAB ups DDS.  MSCO ups AFL, HES.  PALI ups LAZ.  PIPR ups CYBX.  BARD ups SCSC.  UBSS ups MLM, VMC.  CITI cuts D.  JPHQ cuts FRED.  MSCO cuts CFL, PFG. 

Asia lower overnight.  Europe down roughly 50bps.  USD +60bps.  Gold -22bps.  Oil -140bps.  Bonds ticking higher. 

Brightpoint News

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

S&P 500 PreMarket (last/% change prior close/volume): 
DELL INC                       14.68    -7.5 %  2202784
DR HORTON INC             11.34    -7.43%  69900
ANALOG DEVICES           25.84    -7.18%  100
DILLARDS INC-A             14.98    +4.9 %  47240
ALLEGHENY ENERGY        21.14    -4.34%  110
PULTE HOMES INC          9.43      -3.97%  26250
XEROX CORP                 7.53      -3.21%  2834
WYNDHAM WORLDWID   18.49    -3.14%  1000
DYNEGY INC-A                1.98      +3.13% 2300

Today’s Trivia:  The kilogram standard is actually kept in a vault in which European country?

Yesterday's Answer:  Donkeypower is an official term, believe it or not.  It is one-third of horsepower. 


Best Quotes: “-- here's latest on what i've heard on Ukraine Railway story making the rounds........

-- initial story was that Ukrainian Rail defaulted on a bond to Barclays. Story around now is that there is a secondary bond to Deutsche, underwritten by Govt.....

-- if this defaults, it would count as a Sovereign Default -- obviously very bad news for Eastern Europe......

-- that's the story making rounds.... take it for what. It does have the $ stronger this morning.”   --trader chatter