Morning Note...

Futures flat this morning as markets pause ahead of today’s economic data, including November Factory Orders (10am), Pending Home Sales (10am) and December U.S. auto sales.  Overseas, Greece is set to borrow more from banks as it seeks to lower its budget deficit after cuts to its credit ratings.  Bullish comments out of BofAMLCO today:  The HY bond market finished the year in spectacular fashion registering a 3.1% return in December (as measured by BofA-ML's HY Master II; H0A0). For the full year, index returns reached 57.5%, its highest ever. The distress ratio - measured as a proportion of bonds in the index with spreads over 1,000bp - dropped to 17.9% in HY, the lowest level for this metric since May 2008. As HY traditionally leads equity, these developments jive well with BofA-ML's bullish outlook for the US equity market in 2010 which calls for a 12mo target of 1275 on the S&P, implying 12% return from current levels.  We are positive on the Airlines, and the Autos, both notes are tied the economic recovery.  Amidst all the bullishness and froth, however, Morgan Stanley’s Asia Chairman Stephen Roach sees a 40% chance of a double dip recession for 2010.  He also said U.S. monetary policy makers should start to exit emergency stimulus measures now if the economic recovery is indeed as strong as they say it is.  See quote section below for the full text.  In corporate news, BRK/A – which is the top KFT shareholder at 9% - voted against the proposed KFT capital raise needed to help buy CBRY LN.  KFT also announced it would sell its North American pizza brands to Nestle for $3.7B, affectively taking Nestle out of any Cadbury bidding.  GOOG releases its smartphone today – early reviews are quite positive.  Rumors continue to circulate that AAPL will release its tablet device later this month.  Note that – according to BofAMLCO - financials represent 25% of all shorted stocks in the S&P1500 and continue to be in an oversold condition.  WSJ reports personal bankruptcy filings were up over 30% year-over-year for 2009.  BBERG reports Manhattan apartment prices fell for a third consecutive quarter as the decline from the peak reaches 21%.  Franklin Templeton’s Mobius sees emerging markets off as much as 20% as a wave of IPO supply floods the markets.  The IMF sees commodity prices moving higher in their 2010 outlook. 

Solid summary of “Opening Day: 2010” from BTIG’s Mike O’Rourke last night:

The past seven weeks of consolidation must have had investors chomping at the bit to start putting money to work.  The S&P 500 posted its best performance in 8 weeks.  While we are encouraged by the positive performance, celebrations should be moderate.  The first day of trading in 2009 kicked off with a 3% gain, and while the year finished nicely, it was a painful ride for the index to add another 23%.  Another minor short term concern is the level of bullishness in the weekly AAII Sentiment data.  The reading from last week is 68% bullish, which is close to the sell signal threshold of 70%.  The reading has not been this optimistic since the 70.7% reading tallied in late February 2007.  Coincidently, that reading was registered just before New Century went bust, which we deem to be the inaugural event of the credit crisis.  At that time, the S&P 500 registered a 3.5% down day, which was a big move back then.  If you recall, during the previous year, 2006, only 2 sessions registered single day changes greater than 2%.  If investors purchased the S&P 500 when sentiment dropped below the 30% bullish threshold, they generally caught good rallies, even during the recent bear market.  A two decade low in bullish sentiment was registered at 21% the week of March 6th last year.  Needless to say, this is generally a very good timing indicator and should not be taken lightly.  The holiday schedule likely provided some distortion to the poll so we are waiting for this week’s reading, which is due on Thursday.

BCAP cuts FNF.  CSFB ups POT, IPI.  CITI cuts SPW.  JEFF cuts BFRM, HMSY.  ACH positive comments out of MSCO.  BCAP initiates AIB, IRE with UW.  GSCO cuts ASIA.  BSQR renews distribution agreement with MSFT.  JEFF cuts CBY.  CELL lowers guidance.  CRH lowers guidance.  BCAP initiates RBS, CS at Equal Weight.  JPHQ cuts CXO.  BCAP initiates HSBC, DB with OW. CSFB ups ERIC.  France cxls 50M swine flu vaccines (GSK).  LAD, AXL, BIIB, TGI upped at BofAMLCO.  MSCO initiates PALM with OW.  PETD cut at JPHQ.  RAJA ups PSYS.  MSCO ups QCOM.  THC rated Conviction Buy at GSCO.  JPHQ cuts XCO.  GSCO upgrades RSH.  BARD ups AVY.  BofAMLCO cuts AAI.  BARD cuts FSP, GAS, PNY, SLGN, TE, XEL. 

Asia higher overnight.  Europe mixed.  USD flat.  Oil +23bps.  Gold +32bps.

Brightpoint News: 

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

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

TENET HEALTHCARE       5.95      +9.17% 154048

RADIOSHACK CORP        20.91    +5.77% 16250

INTERPUBLIC GRP           7.20      -4.38%  10000

SLM CORP                     11.90    +3.12% 200

BIOGEN IDEC INC            55.15    +2.82% 19480

KRAFT FOODS INC         28.14    +2.59% 287271

HOSPIRA INC                 52.05    +2.22% 428

Today’s Trivia:  Where is the only active diamond mine in the United States?

Yesterday's Answer:  According to Amnesty International, Finland – perhaps due to the popularity of hunting – has the most guns in Europe, per capita. 

Best Quotes:   Double-Dip Risk Seen in ‘Stall Speed’ Recovery: Stephen Roach (2010-01-04 20:00:00.0 GMT)

     Jan. 5 (Bloomberg) -- Where there was despair a year ago, today there is hope. Policy makers have been successful in putting in a bottom to the most wrenching crisis and recession of the post-World War II era. Yet the outlook remains uncertain. That’s because the bottoming process, however encouraging, does little to inform us about the character of the coming economic recovery. There are four key reasons to remain skeptical about the vigor and sustainability of any rebound in the global economy:

     First, the financial crisis itself is far from over. The latest International Monetary Fund estimates put the potential for worldwide writedowns of toxic assets at approximately $3.4 trillion; so far, realized markdowns have been only about half that amount. This points to further earnings impairments for financial institutions and concomitant restraints on their lending capacity.

     Second, the breadth of this global recession was staggering. At its low point in March 2009, 75 percent of the world’s economies were contracting. Typically, the figure is closer to 50 percent. This means it will be much harder to turn around this recession-torn world.

     Third, the demand side of the global economy is likely to be restrained by a protracted pullback of the over-extended American consumer. In the face of a massive labor market shock to jobs and wage earnings, together with the bursting of property and credit bubbles, the consumption share of the U.S.

economy is likely to fall by five full percentage points of gross domestic product -- from its current record of 71.2 percent to the pre-bubble norm of 66 percent.  This should reduce trend growth of real consumption from the almost 4 percent pace of the pre-crisis decade to 1.5 percent to 2 percent over the next three to five years. No other consumer in the world is capable of filling this void.

     Fourth, the supply side of the global economy suffers from massive imbalances, especially China-centric developing Asia.  While, on the surface, post-crisis resilience of the Chinese economy has been impressive, it turns out that 95 percent of the 7.7 percent GDP growth realized in the first three quarters of 2009 was concentrated in the fixed investment sector, which already accounts for an unheard of 45 percent of GDP.  By compounding its existing imbalances, to say nothing of funding this stimulus by a record surge of state-directed bank lending, China risks a serious misallocation of capital and a worrisome deterioration of bank loan quality.

     Considering these powerful headwinds, I expect trend growth in world GDP to average about 2.5 percent over the next three years -- the weakest recovery of the modern era. Significantly, such an outcome would be very close to the “stall speed” for a $70 trillion global economy, meaning that a shock could easily trigger a relapse, or the dreaded double dip.  While seemingly sacrilegious in these days of froth, the theory of the double dip is hardly controversial. Normally, in a cyclical upturn, the release of pent-up demands provides an ample cushion of cyclical resilience, enabling an economy to withstand periodic shocks.  By contrast, a recovery lacking that cushion is far less capable of warding off the unexpected blow. Right now, of course, these concerns ring hollow. Fueled by a temporary boost from the inventory cycle, the hopes and dreams of a vigorous, or V-shaped, recovery suddenly seem credible. But as the inventory dynamic fades -- it always does -- and the weak state of underlying demand re-emerges, a post-crisis recovery could quickly become vulnerable.

     Two potential shocks would play right into that vulnerability, the first being a failed exit strategy from the Great Stimulus. Policy makers are not lacking in tools or tactics to withdraw the extraordinary fiscal and monetary stimulus that has been put in place to save the world. Unfortunately, they are lacking in political will. The odds are high that America’s Federal Reserve will once again embrace an “asymmetrical” exit strategy -- quick to slash the federal funds after the onset of a crisis but slow to normalize policy settings in recovery. This would be a replay of the delayed normalization of 2002-2006, which played a key role in fueling new bubbles and imbalances, setting the stage for the Great Crisis.

     A second possible shock would be heightened trade frictions and protectionism, especially a Washington-led outbreak of China bashing. With the U.S. unemployment rate likely to remain higher than 9.5 percent heading into the mid-term congressional election of 2010, the Chinese currency issue has once again become a bi-partisan lightning rod. If Washington imposes trade sanctions, the Chinese would undoubtedly reduce their appetite for dollar-denominated assets, with severe implications for the dollar and probably real long- term interest rates in the U.S.

     No one can predict shocks. But the theory of the double dip is very clear in one important respect: Shocks can deal lethal blows to anemic recoveries. That remains a real risk in this still fragile post-crisis climate. In contrast to the denial prevalent in today’s ebullient financial market climate, I would assign about a 40 percent chance to a global double dip at some point in 2010.

(Stephen Roach is chairman of Morgan Stanley Asia and author of “The Next Asia.” The opinions expressed are his own.)