Friday, January 15, 2010

Morning Note...

Futures -40bps this morning as markets have plenty of data to digest.  First, INTC reported better than expected after the close last night, and is flat after trading up as much as 3% premarket.  Second, JPM also reported better than forecast (but revenues looked light), and is trading down about 50bps.  Third, there is economic data to consider:  the month-over-month December Consumer Price Index (CPI) was +0.1% vs. 0.2% expected; year-over-year December CPI was +2.7% vs. +2.8% expected; the January Empire Manufacturing reading was 15.92 vs. 12 expected and vs. the prior 4.5 revised December reading.  December Industrial Production and Capacity Utilization were in line with expectations.  The net result of it all has been something of a roller coaster ride.  Futures were bid up last night after Intel’s earnings…they sold off on JPM’s release at 7am…and they rallied slightly on the 8:30am economic data.  Stay tuned, it could be an interesting day, especially in light of potential early exits ahead of the three-day weekend.  In other corporate news, WSJ reports that MOT reconsiders its breakup plan.  Overseas, HBC was upgraded at DBAB, and SAP was cut at MSCO. 

Plenty of chatter about “lack of conviction” and “light volume” over the past fews days… but given today’s earnings & data – and the Fed’s Beige Book earlier this week – will investors digest it all over the long weekend and come out swinging next week, whether bearish or bullish?  This market is tough to read at this early stage of 2010… As always, time will tell.  Given that, BofAMLCO publishes an interesting “look back” at the week that they call “The Best Bits:”

This Week’s Best Bits – Jan 11-15th

It was shaping up to be a record breaking start to the year…..the 6 day winning streak for the S&P500 was the second best ever...until China touched the monetary brake pedal; a ‘tweak’ to short term rates, followed by a ‘nudge’ up in the RRR. It had to happen – a massive US$87bn of new loans were handed out in the first WEEK of the year. And all this is into an economy where almost every piece of anecdotal evidence tells you that domestic prices are on a huge surge.  Beer joins the growing list of consumer products in China were prices are rising (wine, vegetables, pork, garlic, chilli, cotton, water, gasoline etc). Yanjing brewery hike retail prices 25%. So up go our China CPI forecasts from 2.5% to 3.1% (with the warning it will reach 4% later this year). And in India we are talking about up to 8% inflation rates.  Wages are running up 10-15% and China’s trade is back to all time highs. Exports surged 17.7% in December. ‘Sooner than we expect but not a turning point for the market’ our strategists cry. Although they accept there is plenty more where that came from….. Precedent from Australia, Norway and Israel is that you don’t sell the first hike but China is the only market down this year. The Fed rule for EM equities: “go long emerging markets on the Fed's penultimate rate cut and short them on the Fed's penultimate rate hike". That’s delivered a 37% annualised return. So when will Bernanke raise rates? Given that he spent this week defending Greenspan it wont be a 2010 event we say. No surprises here: metals and mining estimates up again – mainly as our iron ore benchmark rate leaps 70%. Ditto coal.  And US Steel gets added back to the buy list. For those in the fast lane the Russians may be more your tipple; 4/5 companies we cover now rated buy. Inflation hounds – check out our new BofA-ML Baidu inflation index. But it’s not all commodities – our Wise men tell private clients to finally ditch those bonds and shift to equities – the ‘humiliated’ asset class of the last decade. And given the steepness of the yield curve our Asian brains thinks a resources to banks switch makes a lot of sense. The equity to bond switch sounds good in theory, but credit markets are certainly holding their own so far this year. And making the equity call equally tough is the inauspicious start to Q4 reporting season. Alcoa, Chevron and Electronic Arts all falling short of expectations. But, don’t be too hasty. In aggregate Q4 results should in impress, with, finally, evidence of real top line growth. Intel steadies the ship. For 2010 the market expects equity returns of 5-10%; sounds ok but statistically this is very unlikely – incredibly 5-10% returns have only occurred 5 times in the last 83 years. In the States, the Beige book did suggest a broadening out of the economic recovery but retail sales fell victim to the weather (internet sales trend bucking again).  And still no sign of a manufacturing recovery in Japan – a shocking machinery orders number for November. So it’s left to Australia to carry the can for developed world economies….another 35K jobs added in December. What global recession? And confirmation – Korean did manage a soft landing. Odd, then its FX was treated so harshly last year. Korean Air a perfect play on this with its USD$ debt. It also happens to be the biggest cargo carrier in the world to boot.  On the subject of planes both the European and US airlines pitched by the analysts this week as recovery plays. Air France goes on our Europe 1 list and AMR can 3-bag from here. But, the cyclical downgrades are starting to gather some momentum. We call time on a host of European chemical stocks as valuations look toppy….and we return to our negative stance on semiconductors with a further raft of downgrades – there’s trouble ahead as inventories start to build.  What are the spending intentions of 250 global industrial companies? Fortunately we have analysts covering them and it sounds like those big expansion projects are still on ice. But after a quarter of no orders we think the worst is priced in to Alstom. We do however drop Ericsson; low-cost providers competing on their patch is not new news but their presence is increasingly hard to ignore. But at least someone is willing to stand up against the Chinese – Google cut their nose off to spite their face walking away from 25% market share of a market growing 40% a year. Of course this leaves the market wide open for  If this is the year for sales growth then forget this lot – death by a thousand cuts for the US telcos. The highest margin, highest market share US player kick-starts a price war. Big mile-stone ahead…..US DIY stores Home Depot and Lowes are within a breath of returning to positive same-store-sales growth….People clearly want to spend on their homes again – note a punchy upgrade to Gebrit. But consumer story of the week is surely Tiffany’s – a consensus-smashing 11% constant currency growth over the holidays. Perhaps we should have seen it coming, high end department stores Saks and Nordstorm's December comps of 7.4% and 9.9% respectively were about 4x higher than consensus was modelling – US retailers are building inventory again! Its not just consumers splashing the cash, some corporates are loosening the purse strings – 7% qoq sales growth at tech services giant Infosys has our analyst scrambling to cover her short….opex is back. With 23 brands with sales in excess of $1bn each is hard to write-off Proctor & Gamble. They generate a $1bn in FCF a month so there’s plenty of firepower to kick-start growth. We are back as buyers.  And with 18% total return on offer we also upgrade Kellogg’s. How many $55bn healthcare companies do you know that plan to double sale over the next 5 years? The entire market cap of the ‘alternative energy’ space is only half that of PetroChina. Worth spending this weekend reading our view of how this industry is set to evolve in the next 50 years.

TRA withdraws offer to acquire Terra Industries.  BCAP ups CSE.  BMOC ups FCX.  GSCO ups EIX, POR.  MSCO ups NVE, WR.  THNK ups INTC.  CITI cuts AYR.  CSFB cuts CTCM.  GSCO cuts CNL, DUK, EXC, GXP, TOL.  JPHQ cuts CNW.  MSCO cuts CNW, DUK, ED, SO, TE.  UBSS cuts INCY. MSCO starts AIB at OW.  FBRC ups AMD.  AZZ downside guidance.  Shiseido to buy BARE for $18.20/share.  BWEN to price 15M secondary.  JEFF cuts NVO.  JPHQ ups OMX, SPLS.  SHFL beats by 3c.  BLAIR ups WSO.  ING cuts TOT. 

Asia mixed overnight.  Europe roughly 50bps lower.  USD +55bps.  Oil -90bps.  Gold -70bps. 

Brightpoint News:  

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

S&P 500 PreMarket (last/% change prior close/volume): 
MANITOWOC CO            13.70    +4.98% 86314
AES CORP                     13.52    -4.05%  186
SPRINT NEXTEL CO        3.82      +3.52% 784954
UNUM GROUP                 20.85    -2.80%  100
JDS UNIPHASE               8.19      -2.38%  700
LSI CORP                       6.11      +2.35% 13325
XCEL ENERGY INC           21.12    -2.27%  127

Today’s Trivia:  Which continent has the most countries?  The least?  

Yesterday's Answer:   Countries with sub-100k population include Kiribati, Antigua & Barbuda, Andorra, Seychelles, Dominica, St Kitts & Nevis, Liechtenstein, Monaco, Palau, Nauru, etc.  (

Best Quotes:   Just for kicks – a little more conspiracy talk that crossed my desk yesterday, referencing action in the futures market (ESH0 is the front month of the e-mini futures – the most liquid S&P futures market) at noon on Wednesday… 

The Fed Finger: More Observations On The ESH0 Incident
What happened at 12:03pm Eastern Time? There were no reports out, the 10-YR Note auction wasn’t until 12pm, and the S&P500 was a bit stonewalled just under 1137.00 after a rally from the day’s low. As the market advanced slowly through the congestion it hit: a MASSIVE order, or series of orders, lifted the offer in the e-minis. But it wasn’t your garden variety large order of 2,000 minis – I’m talking about 114 times that size.  At 11:03am today at the Chicago Board of Trade (12:03pm EST) over a quarter of a million mini-S&P500 orders traded north of 1137.00! (228,000 last count) I looked at the attached chart in disbelief. Could this be real I wondered? Was it some sort of computer malfunction that added too many zeros to the reported, yet smaller, trades? No, that’s not what happened. In fact, a bit of a hullabaloo occurred around my trading booth on the floor of the CBOT as many locals, brokers, and compliance members stared at the aforementioned volume chart in disbelief. As it turns out, all of the trades were indeed valid. None were busted. Moreover, as one of the compliance members told me, he saw the trades listed sequentially (1,000 or 2,000 lot orders) and they all occurred with milliseconds of one another until the massive order was completed. This order size takes a SERIOUS bankroll to get done. If you are wrong by one-point on a 228,000 lot ES order, you can say goodbye to $11,400,000.00. If you contemplate this size your margin requirement is $1,282,500,000.00, while the notional value is $12,961,800,000.00. Has a new “playha” hit the scene? Is his nickname “Helicopter?” Has high frequency trading (HFT) taken root in the mini-S&P in a huge way? In the end it may turn out to have been a “cross trade,” where one institutional firm prearranges a large order with another to clear it in an orderly fashion. As of now I don’t have a firm answer, but whether it was HFT activity, the “Helicopter,” or a massive cross trade, it sure set the bottom in for the afternoon. Everyone in the Dow, Nasdaq, and S&P pits were talking about it and nobody was willing to sell into that massive bid. Trade well and follow the trend, not the so-called “experts.”

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